Revisiting Chinese Tech Giants: Alibaba vs. Baidu

Investors have largely overlooked Chinese companies in recent years due to various challenges, including a tech crackdown by the Chinese government and a strained relationship with the U.S. However, a recent stimulus package announced by China has reignited interest in this sector. Investors are particularly focusing on major tech companies like Alibaba (NYSE: BABA) and Baidu Inc (NASDAQ: BIDU).

This leads to an important question: which of these two companies is the better stock to invest in? Let’s explore their business models and future prospects.

Image source: Getty Images.

Understanding the Business Models of Alibaba and Baidu

Both Alibaba and Baidu are pioneering technology companies in China, having evolved significantly over the past two decades to become tech giants.

Alibaba started as an e-commerce platform but has branched out into various sectors, including fintech through Ant Group, cloud computing with Alibaba Cloud, logistics via Cainiao, and even entertainment. The company’s flagship platforms, Taobao and Tmall, dominate China’s e-commerce market, and Alibaba Cloud stands as the leading cloud provider in China.

Beyond its renowned services, Alibaba’s smaller segments are also noteworthy. For instance, Cainiao Logistics excels in logistics solutions, reaching over 200 countries. Alibaba has even expanded its e-commerce presence to regions like Turkey and Southeast Asia, transforming from a local Chinese brand to a global tech powerhouse.

In a similar vein, Baidu has diversified beyond its original focus on search engines. The company has ventured into AI Cloud, autonomous driving, and entertainment. Its main product, the Baidu App, boasts 703 million monthly active users, which is nearly half of China’s population. As the frontrunner in China’s search market, Baidu primarily earns from advertising but is also investing in growth areas like AI and autonomous driving.

Prospects for Alibaba and Baidu

Having established their business models, let’s look at the future for Alibaba and Baidu.

Starting with Alibaba, the company faces significant challenges in maintaining its e-commerce market share in China. Competitors like Pinduoduo and Douying have chipped away at its dominance, particularly as Alibaba’s operations have broadened. Nonetheless, the new CEO has sharpened the company’s focus on core e-commerce, with promising early results. In the recent quarter, Alibaba reported growth in gross merchandise value (GMV) and orders, improving by high single digits and double digits, respectively.

While Alibaba encounters obstacles in its domestic e-commerce, segments such as Alibaba Cloud and international sales are poised for rapid growth. Alibaba Cloud, for instance, is benefiting from a shift towards cloud computing and increasing demand for AI solutions. In the last quarter, revenue from public cloud and AI products surged by double and triple digits year over year.

Additionally, Alibaba’s international e-commerce witnessed a 32% revenue increase, while Cainiao reported a growth of 16% year over year. Although historic growth rates may not be sustainable due to its size, Alibaba is still on a path for solid growth, supported by China’s economic expansion and emerging business ventures.

Baidu, like Alibaba, faces challenges with its core advertising revenue, which has been impacted by competition from platforms like Douying and Kuaishou. In the latest quarter, online marketing revenue dipped by 2%. However, the company capitalized on its profitability to invest in promising sectors like AI Cloud.

Additionally, Baidu has made strides in autonomous driving through its Apollo Go service, which recorded 899,000 rides in the second quarter of 2024—bringing its total to over 7 million. While success isn’t guaranteed, if Baidu’s ventures achieve their potential, they could create substantial value for investors in the long run.

Implications for Investors

In conclusion, neither Alibaba nor Baidu emerges as a clear leader. Alibaba boasts a diverse business model with growth opportunities across various sectors, both domestically and internationally. Meanwhile, Baidu remains primarily focused within China but harbors promising potential if its ambitions in AI Cloud and autonomous driving materialize.

Ultimately, investors should evaluate their expertise and beliefs regarding the growth potential of each company before making investment decisions.

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*Stock Advisor returns as of October 14, 2024

Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends Baidu. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.