Best Stock to Buy Right Now: Alibaba vs. Baidu

Chinese tech bellwethers Alibaba and Baidu have significantly underperformed over the past five years due to regulatory pressures and intense competition, despite both investing heavily in AI for future growth. Alibaba's strategy, which leverages AI to stabilize its profitable core e-commerce and expand its cloud business, projects an 8% revenue and 12% EPS CAGR through FY28, making its approach appear more sustainable despite unprofitable international ventures. Conversely, Baidu's core search business is challenged by rivals, and its AI Cloud expansion, while driving 3% revenue growth through 2027, is forecast to result in a 5% EPS decline, suggesting a less clear path to profitability. Consequently, Alibaba is presented as the superior investment, offering a more stable outlook amidst ongoing market challenges.

Analysis

Alibaba and Baidu, bellwethers of China's tech sector, have significantly underperformed over the past five years, with BABA down over 40% and BIDU approximately 10%. Alibaba's revenue primarily stems from its Taobao and Tmall e-commerce, while Baidu relies on its online search and advertising, both facing intense regulatory and competitive pressures.

Alibaba navigates headwinds from 2021 antitrust regulations and competition in e-commerce. Yet, analysts project an 8% revenue CAGR and 12% EPS CAGR from FY25 to FY28, driven by AI-driven marketplace stabilization and cloud expansion via Qwen LLMs. Its 20x next year's earnings is considered "reasonably valued" despite unprofitable international ventures.

Baidu's dominant search engine faces intense competition from Tencent's WeChat and ByteDance's Douyin, while its AI Cloud segment, though growing, remains unprofitable. Analysts forecast a 3% revenue CAGR from 2024 to 2027 but a concerning 5% negative EPS CAGR, indicating an inability to offset core advertising declines. Its 19x next year's earnings valuation is not a bargain given this "dim outlook."

While both sacrifice near-term margins for long-term growth and are impacted by U.S.-China trade tensions, Alibaba's strategy appears more sustainable. Its core e-commerce, though slowing, lacks the existential threat of Baidu's search engine, positioning Alibaba as the "better buy" if broader market tensions ease.

Key Decisions for Investors

• Consider Alibaba (BABA) as a potential long-term investment, given its projected EPS growth, reasonable valuation, and more sustainable strategy in stabilizing core e-commerce and expanding cloud services.
• Exercise caution with Baidu (BIDU) due to its core advertising business facing an "existential crisis" and analysts' forecast of negative EPS growth, indicating significant challenges in monetizing its AI investments.
• Monitor the broader geopolitical landscape, particularly U.S.-China trade relations, as easing tensions could provide a significant tailwind for Chinese tech stocks, potentially unlocking value in Alibaba.
• Evaluate the execution of Alibaba's AI integration and cloud expansion, and Baidu's ability to scale its AI Cloud and ERNIE chatbot profitably, as these are critical drivers for future performance.