This analysis critically examines two major players in China's technology sector, Alibaba and Baidu, both of whom are heavily investing in AI-powered cloud computing. Despite their common strategic direction in AI, their core business models, which historically drove their profitability, are currently encountering significant headwinds. The article explores the factors contributing to the decline in their stock performance over the last five years and seeks to determine which of these tech giants offers a more promising investment outlook in the current volatile market.
Alibaba, primarily known for its extensive e-commerce platforms like Taobao and Tmall, derives the majority of its income from these digital marketplaces. Its cloud division, though growing, operates with narrower profit margins. The e-commerce sector has been particularly affected by stringent regulatory actions initiated in 2021. Chinese antitrust authorities imposed restrictions on practices such as exclusive merchant agreements and aggressive promotional tactics, which previously allowed Alibaba to maintain its market dominance. These regulations have intensified competition from rivals like PDD and JD.com, leading to a more fragmented market.
Furthermore, Alibaba's global expansion efforts, including overseas marketplaces such as Lazada and Trendyol, and its logistics arm, Cainiao, are currently not profitable. While these ventures contribute to revenue growth, they simultaneously pressure overall profit margins. Analysts project that Alibaba's revenue will grow by 8% annually, with earnings per share increasing by 12% through fiscal year 2028. This growth is anticipated to be driven by enhanced AI recommendations on Taobao and Tmall, improved merchant tools, and expanded logistics capabilities, alongside the integration of its Qwen large language models in its cloud services.
Baidu, on the other hand, is a leader in China's online search engine market and boasts a significant streaming video platform, iQiyi. Its revenue and profits are predominantly generated through online advertising across these services. Baidu is also rapidly expanding its 'AI Cloud' platform, which, while growing faster than its advertising business, is currently incurring losses. The company faces stiff competition from Tencent's WeChat, a 'super app' that integrates social, search, e-commerce, and payment features, as well as ByteDance's Douyin (TikTok globally), which is attracting a younger user base.
In response to these competitive pressures, Baidu is enhancing its mobile app, developing managed business pages, and integrating its AI chatbot ERNIE into various services. These initiatives aim to reduce its reliance on traditional advertising and leverage its AI capabilities. However, these expansions are impacting its short-term operating margins. Analysts predict a 3% compound annual growth rate for Baidu's revenue from 2024 to 2027, but a concerning 5% negative CAGR for its earnings per share over the same period. This forecast suggests that the company's investments in unprofitable new services may not offset the ongoing decline in its core advertising segment, making its current stock valuation less attractive.
Both Alibaba and Baidu are grappling with immediate operational challenges, and their stock performance remains susceptible to the broader geopolitical tensions between the U.S. and China. However, if these tensions de-escalate, there could be renewed investor interest in Chinese technology stocks. In such a scenario, Alibaba appears to be a more robust investment choice compared to Baidu. While both companies are prioritizing long-term revenue growth over immediate profits, Alibaba's strategy seems more sustainable. Its fundamental e-commerce operations, though experiencing slower growth, do not face the same existential threats as Baidu's core online search business. Although Baidu might eventually recover, a more cautious approach is advisable until clearer signs of sustainable growth emerge.