Nomura rates Alibaba at Buy with a price target of $170. The stock rose 2% in morning trading. Nomura rates Baidu at Neutral with a price target of $135. Baidu stock slipped 5% in Tuesday's morning trading
Baidu is among the Chinese tech stocks that have rallied this year amid optimism over artificial intelligence -- an upward trend line that looks to buck years of rocky performance from regulatory and growth challenges.
Crashing from peaks above $300 in early 2021, Baidu stock has spent much of the time since wallowing between $80 and $150, but hasn't traded this high in two years.
While Baidu has recently been outperforming its tech and AI rival Alibaba -- rallying almost 50% in the past month compared with Alibaba's 32% -- the latter company may be a better pick, analysts at Nomura said over the weekend.
"Alibaba is a more attractive alternative," analysts Jialong Shi and Rachel Guo wrote in a note.
The crux of the Nomura thesis is that, while Baidu's chips business -- central to AI -- is promising, its core search and advertising business faces headwinds from the very AI boom that has boosted the stock. Baidu is frequently compared with Alphabet and called China's answer to Google.
"[Baidu's chips arm] KLX and [Alibaba's] T-head are both among the top domestic chip designers in terms of knowhow and performance of their chips," Shi and Guo wrote. "We believe both KLX and T-head will likely benefit from the rising inference demand of Chinese LLMs in view of tightening scrutiny by the China government over purchasing overseas chips."
However, Nomura sees the headwinds facing Baidu's search and ads business potentially canceling out tailwinds for the stock from AI and chips.
"Unlike its U.S. search peer, Google, Baidu's footing in the traditional search market had already been significantly weakened even before the rapid emergence of AI search," the Nomura analysts wrote, pointing to the internet landscape in China, where much mobile activity occurs within third-party apps that Baidu cannot easily penetrate -- such as WeChat.
The emergence of AI-driven search is another threat to Baidu, the team at Nomura said, with competitors such as Tencent and Alibaba growing their own in-house AI search capabilities. While Baidu has leaned into AI search, which Nomura views as the right strategy for user retention, it is coming at the expense of key revenue from search engine ads.
"We are concerned that Baidu's intensified efforts to push into AI search so far does not seem to have helped to arrest the loss of its search app's users and time spent...which might suggest Baidu's AI search has failed to generate the desired traction with users," Shi and Guo wrote. "We believe Alibaba stock offers more appealing risk reward vs. Baidu at current price levels."
