Chase the Surge in Alibaba or Baidu Stock?

Chinese tech leaders Alibaba and Baidu have experienced a 30%+ stock surge since a May U.S.-China trade agreement, reaching 52-week highs, driven by significant investments and advancements in multimodal AI, including Alibaba's $50 billion AI pledge. While both companies project sales and EPS to rebound in future fiscal years after near-term dips, their valuations, despite the rally, remain relatively reasonable compared to U.S. peers. Zacks maintains a 'Hold' rating, indicating that while AI expansion supports long-term potential, better buying opportunities may emerge after the rapid ascent.

Analysis

A favorable U.S.-China trade agreement in May has catalyzed a significant resurgence in Chinese technology equities, with Alibaba (BABA) and Baidu (BIDU) surging over 30% to fresh 52-week highs. This rally is underpinned by strong optimism surrounding their advancements in artificial intelligence, particularly the development of multimodal AI models. Both companies are capitalizing on China's restrictions on Nvidia's AI chips, with Alibaba unveiling its 'Qwen3-Max' model and pledging over $50 billion to AI development over three years, while Baidu leverages its proprietary 'ERNIE' LLM and internally designed chips. Despite this positive momentum, near-term financial forecasts present a mixed picture. Alibaba's earnings are projected to decrease 14% in FY26 before rebounding 39% in FY27, and Baidu's earnings per share are slated to drop 28% in FY25 before recovering 9% in FY26. From a valuation perspective, the rally has pushed forward P/E multiples to 21.8x for BABA and 15.9x for BIDU, up from recent lows under 12x. However, their price-to-sales ratios remain historically low at under 3x, suggesting they may still be reasonably valued relative to U.S. peers.

Key Decisions for Investors

• Given the rapid 30% share price appreciation and a Zacks 'Hold' rating on both stocks, investors should be cautious about chasing the rally, as more attractive entry points may emerge after a period of consolidation.
• Long-term investors should weigh the significant AI-driven growth potential, evidenced by multi-billion dollar investments and strategic partnerships, against the projected near-term earnings declines of 14% for Alibaba and 28% for Baidu.
• Despite the recent price surge, valuations based on price-to-sales ratios remain at historical lows for both companies, suggesting that value-oriented investors may still find these names compelling relative to their U.S. tech counterparts.
• For those seeking to mitigate single-stock risk while gaining exposure to the broader rally in Chinese tech, considering diversified instruments such as the Invesco China Technology ETF (CQQQ) is a prudent alternative.