Ranking Baidu vs. Alibaba for Growth Stock

Alibaba (NYSE: BABA) and Baidu (NASDAQ: BIDU) were once safe bets on China's long-term growth. Baidu holds the country's top search engine, while Alibaba runs its main e-commerce marketplaces and cloud infrastructure platform. Baidu's stock fell 60% and Alibaba's plunged 68% in three years. See why these two Chinese IT giants failed and if each is worth buying as a turnaround play.

According to StatCounter, Baidu still controls 60% of China's search market, but Tencent's Weixin (WeChat overseas), ByteDance's Douyin (TikTok overseas), and Alibaba's e-commerce marketplaces all offer integrated search tools.

Baidu is seeking to reverse that tendency by extending its Managed Business Pages, which let enterprises manage their own online storefronts and websites within Baidu's ecosystem, and turning its mobile app into a "super app" like Weixin. To lessen its dependence on online ads, Baidu is modernizing its cloud infrastructure platform and investing in the AI market's secular growth with its Ernie natural language processing engine, generative AI services, and Apollo driverless car platform. In 2023, iQiyi became profitable.

Those are positive developments, but Baidu still made more than half its revenue from internet marketing in 2023. In 2022, revenue fell 8%, but in 2023, it rose 6%. In 2024, analysts predict Baidu's revenue and earnings to climb 8% and 15%. As China's macro climate improves, Baidu stock appears inexpensive at 12 times forecast earnings. Advertising and cloud revenues should stabilize.

China's antitrust regulators cracked down on Alibaba's e-commerce platforms in 2021, causing problems. After a record $2.75 billion fine, the business had to cease its exclusive merchant partnerships, limit its advertising techniques, and get government clearance for large expansions and acquisitions.

Those harsh restrictions reduced Alibaba's advantage over PDD and JD.com. China's economic slump and unanticipated "zero COVID" lockdowns increased pressure. Alibaba's cloud business also struggled with poor enterprise expenditure and decreased revenue from ByteDance, which moved U.S. TikTok customers' data to Oracle's servers in 2022.

Alibaba's revenue climbed 2% in fiscal 2023 (ending March), compared to 19% in 2022. In fiscal 2024, two tailwinds should boost revenue and profitability by 9% and 45%, respectively.

The company expects its higher-growing overseas e-commerce business—Lazada, Trendyol, and AliExpress—to counterbalance the slower growth of Taobao and Tmall in China. Second, Alibaba is adding third-party logistics services to Cainiao logistics to enhance sales and operating margins. Alibaba stock is cheap at 11 times projected earnings.

Both Baidu and Alibaba could recover from their recent slowdowns, but their stocks remain undervalued due to unexpected U.S. and Chinese regulatory issues. Recent export limits on advanced AI processors to China may hinder both businesses' AI and cloud ecosystem expansion. As they expand, China's antitrust officials may put pressure on both tech titans.

Until Baidu and Alibaba overcome those issues, their equities may remain steeply discounted to American rivals.

Both stocks aren't my favorites right now because there are stronger growth prospects in the U.S. market with fewer regulatory hurdles. My choice would be Baidu since its growth rates are more stable, it's less scrutinized by China's antitrust officials, and its business is more diverse. Before becoming an undervalued growth play again, Alibaba must stabilize its Chinese e-commerce and cloud operations and stop hyping its international growth.

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