2 Chinese Stocks With Big Upside

Chinese stocks might have gone from uninvestable to worth exploring, given the discounted valuations to be had on a number of internet stocks, many of which are making huge splashes in AI. Undoubtedly, the AI race isn’t just among firms within the U.S. markets; it’s a global one, and one that may very well see China sit in a number-two spot that’s not all too far behind America.

Either way, industry pundits have warned not to get too comfortable, given that China could realistically catch up in the race. It’s not just the large language models (LLMs) or agents where China can pull ahead, but the hardware that takes care of the training and the inference.

Undoubtedly, hardware independence comes with the territory, and while that could mean cutting Nvidia (NASDAQ:NVDA | NVDA Price Prediction) out of the equation, even though the U.S. has approved the chips to be sold in China with a 25% surcharge. In any case, China’s AI innovators are moving rapidly, and they’re arguably heavily, while exploring workarounds (think efficiencies) to maximize bang for the buck, even with AI accelerators that may not be the very best in class.

Sometimes resource constraints force firms to become more creative and innovative. In any case, with the Chinese model Zhipu AI trained entirely on Huawei chips, questions linger about whether China can pull ahead without the likes of the world’s top GPU maker. Of course, there’s still some catching up to do, but China’s AI innovators are not to be taken lightly, since odds are high that we’ll witness massive breakthroughs from outside the U.S.

This piece will explore two Chinese internet stocks with AI upside and relative value for investors worried that the S&P could be in for weak performance in the coming decade despite the productivity tailwind from AI.

Alibaba

Alibaba (NASDAQ:BABA) is pretty much the Amazon (NASDAQ:AMZN) of China. It’s the AI cloud juggernaut and the e-commerce titan with a treasure trove of data and the know-how to take applied AI tech to the next level. Additionally, Alibaba has one of the most used open-source LLMs out there with Qwen. Undoubtedly, Qwen is gaining in popularity, and there might be no slowing it in its tracks. As the company continues ramping up infrastructure, I do think that the growth will not be too far to follow.

Given its cloud dominance and open-source leadership with Qwen, I think Alibaba stock has more ground to gain. The stock goes for 18.7 times forward price-to-earnings (P/E), far less than you’d pay for a U.S. comparable. With the latest Qwen upgrade impressing, I do think Alibaba’s momentum is worth following closely. If China is to catch up, Alibaba will play a massive role.

In short, the company is far more exciting than the multiple would suggest.

Baidu

Baidu (NASDAQ:BIDU) is more like the Google of China, and given its impressive Ernie bot, it’s also a force in the AI race. Like Google, it has momentum in the cloud.

However, unlike Google, shares of Baidu aren’t as hot and are going for a multiple I find to be absurdly low, with shares trading at 13.3 times trailing P/E. With plans to spin off the AI chip division, there’s significant value to be had once the big split finally does happen.

In the meantime, it’s the chip business, Kunlunxin, which might grow to become the force that helps China achieve independence from U.S. GPU makers. All considered, Baidu has an interesting AI narrative that’s going for a vast discount right now. With shares popping 70% in six months, perhaps there’s more momentum ahead, as the sleeping AI giant looks to wake up.