Baidu may be a good option for some investors right now, despite its risks.
The growing popularity of AI stocks has made many of them expensive, and some investors are turning to Chinese tech stocks to find bargains in the space. However, this approach carries additional risks compared to investing in domestic companies, as Chinese companies often have their operations hit by geopolitical conflicts.
Fortunately, these disputes may not make Chinese stocks as uninvestable as some investors think. Despite being a stock like a tech giant, Baidu (Bidu -0.56%) This is not for the faint of heart, and more risk-tolerant investors may conclude that it's worth opening a position in the company.
Baidu and AI
Baidu has long attracted the attention of investors as it operates China's No. 1 search engine. According to MarketMeChina, Baidu accounts for more than 60% of China's search traffic across all platforms. In the mobile-only search segment, its market share rises to 78%.
Moreover, it is not only the Chinese version, alphabetWhen it comes to search, it's Google. Similar to Google's parent company, Baidu's business includes segments covering cloud, intelligent driving, and mobile. Baidu also owns Iqiyi, a YouTube-like platform that streams both user-generated videos and professionally developed content, like what you see on TV. Netflix.
But most of the company's AI-related potential appears to come from its AI cloud, which includes compute and storage, networking, databases, big data, and security applications. This also includes Baidu Cloud Compute (BCC) services, which are based on virtualization and distributed cluster technology.
Baidu AI claims a total of more than 5,700 patent applications, which is the second most in the deep learning field. It has also developed a “full-featured” AI chip called Baidu Kunlun. According to the company, one of its applications, the Ernie bot chatbot, currently has more than 200 million users.
Risk factors and Baidu stock
But the tenuous state of U.S.-China relations is weighing on Baidu and many of its peers. Those concerns became even more of an issue for investors in 2022, when the U.S. Securities and Exchange Commission threatened to delist the company from U.S. stock exchanges if it failed to meet audit requirements. Negotiations between U.S. and Chinese regulators ultimately subsided the threat of delisting against Chinese companies. However, considering the ongoing friction between the US and China, it is natural for Baidu shareholders in the US to be concerned about the state of their investments.
Such concerns appear to be hurting stock prices. Barring price spikes and reversals during the 2021 bull market, Baidu stock has been mostly range-bound for the past five years. And even though the company's profits have improved over the past year, its stock price has fallen more than 25%.
Additionally, Baidu admitted that its Kunlun AI chip cannot perform all AI functions.was dependent on Nvidia A chip for training large language models. Just recently, Baidu transferred this business to Huawei because Western sanctions made it difficult to buy Nvidia chips, Reuters reported.
In fact, Baidu stock is likely to trade at a discount given the risks to its business. However, the market may have overestimated the risk.
Currently, Baidu's P/E ratio is 12x. This is well below the 27x price-to-earnings ratio of struggling US company Alphabet.
Investors should also consider that there are reasons for political leaders in both countries not to change existing business agreements. Any deterioration would undoubtedly not only hurt China financially, but also put these investments at risk and make many American investors even poorer. Both countries therefore have an incentive not to jeopardize such relations.
Should I buy Baidu stock?
Given its political background, Baidu is not a stock for risk-averse investors. Nevertheless, risk-tolerant investors can make a case for holding the position. With its search dominance in the domestic market, growing AI capabilities, and poor valuation, Baidu could be poised to reap huge profits absent political challenges.
Additionally, the stock's low cost may take into account the political risks Baidu faces and its dependence on Nvidia and Huawei for some AI. Ultimately, Baidu may be a good fit for some investors' portfolios if they want to buy AI stocks at a low cost.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool's board of directors. Will Healy has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Baidu, Netflix, and Nvidia. The Motley Fool has a disclosure policy.