Once a neglected group, Chinese tech companies have recently captured the attention of investors thanks to a series of positive developments, such as the huge government stimulus and the rise of artificial intelligence (AI) services like DeepSeek.
Investors looking for companies they can invest in to benefit from the growth of AI in China have generally focused on leading tech companies like Alibaba(NYSE: BABA) and Baidu (NASDAQ: BIDU). But which of the two is a better choice?
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The similarities between Alibaba and Baidu
Founded as the first-generation tech companies in China, Alibaba and Baidu have evolved over the years to become massive tech conglomerates operating in multiple industries.
The former is an e-commerce giant, a leader in cloud computing, a major cross-border e-commerce player, a leading logistics company, and more. The latter owns China's most prominent search advertising business and other businesses in AI cloud, autonomous driving, and entertainment.
Their diversified business models provide a stable source of profit, which the tech giants can reinvest in areas with the most significant growth opportunities, such as artificial intelligence. Besides, both companies have plenty of cash on their balance sheet.
In the latest quarter's earnings, Alibaba had a $50 billion net cash position (cash and cash equivalents, short-term investments, and other Treasury investments less debts). Similarly, Baidu's net cash position was $11 billion. Pristine financial health is a significant advantage for both giants, since investing in AI is costly and spans years, if not decades.
Also, both companies have long invested in the cloud computing industry, owning a leading market share in the Chinese cloud market. According to Statista, Alibaba Cloud and Baidu Cloud occupy the first and third positions in China in terms of market share. Owning the cloud infrastructure provides both companies with essential computing resources to invest in leading AI technologies.
Moreover, as both companies own substantial business interests in China, they face similar risk profiles in political and regulatory risks, geopolitical challenges, operational risks, and others. Investors will have little choice but to accept these risks.
Both tech giants are vastly different in many aspects
Despite the similarities, the tech giants are still vastly different businesses.
Alibaba generates most of its revenue from the e-commerce industry thanks to its flagship Taobao and Tmall platforms and overseas e-commerce business. In the latest quarter ended Sept. 30, 55% of Alibaba's group revenue came from these e-commerce ventures. Conversely, Baidu makes most of its income from the search advertising business (56%) and cloud computing (23%).
While both companies have an enormous interest in AI, Alibaba predominantly employs AI to empower its existing businesses, such as using AI chatbots and AI product recommendations in its e-commerce. Similarly, AI will enhance Alibaba's other operations, such as logistics and fintech.
Still, Alibaba will generate income directly from offering its AI services, predominantly in its cloud computing business. In this business, customers will pay to subscribe to Alibaba's AI products like Qwen (Alibaba's large language model), machine learning, etc.
On the other hand, Baidu has gone all-in on AI, positioning itself as an AI-first business. It uses AI extensively in its search advertising business and provides AI services in its cloud computing segment. Besides, Baidu is an early mover in the autonomous vehicle segment, applying its AI technologies to build its autonomous driving platform. As of Oct. 28, 2024, Apollo Go, Baidu's autonomous ride-hailing service, has already provided over 8 million rides to the public.
Another essential aspect is the region from which the tech giants generate their income. Alibaba has built a vast empire beyond China in its primary business segments across e-commerce, cloud computing, logistics, and fintech. On the other hand, Baidu generates almost all of its income in China, making it more susceptible to changes in the local Chinese operating environment.
What it means for investors
Overall, there is no clear winner. Both have enormous interests in AI and have positioned themselves to win in this AI revolution.
Investors looking for a pure AI play should consider Baidu, since it has rebranded itself as an AI company.
Meanwhile, despite its significant exposure and investment in AI, Alibaba retains enormous business interest in areas like e-commerce, fintech, and more. Thus, its AI strategy will focus on providing AI products and services to its cloud computing customers and employing AI technologies to enhance its operations.
Investors should, therefore, choose the one with which they have better conviction.
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Lawrence Nga has positions in Alibaba Group. The Motley Fool has positions in and recommends Baidu. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
