Chinese AI Stocks: Alibaba & Baidu Offer Value Play

The artificial intelligence boom has created staggering valuations in the U.S. market, making entry points increasingly expensive for investors seeking exposure to this transformative technology. Meanwhile, Chinese internet stocks like Alibaba and Baidu have been trading at substantial discounts despite making significant strides in their own AI development. This valuation disparity presents a unique opportunity for international diversification, particularly as China’s government prioritizes domestic AI solutions over foreign alternatives.

Alibaba trades at just 18.7 times trailing price-to-earnings, while Baidu commands an even lower multiple of 12.4 times P/E. These valuations stand in stark contrast to their American AI counterparts, many of which trade at multiples several times higher. The discount reflects lingering concerns about China’s economic outlook and geopolitical tensions, but it may also represent a mispricing of these companies’ AI potential. With both stocks rebounding significantly in recent months—Alibaba up approximately 94% year-to-date and Baidu gaining nearly 48% over the past month—the market appears to be recognizing this discrepancy.

Alibaba, the e-commerce juggernaut that lost over 76% of its value at its lowest point, is aggressively pursuing AI dominance through multiple channels. The company’s Qwen large language model has reached a level of competitiveness that challenges other leading LLMs, with the recently unveiled Qwen-3 model demonstrating significant advancements. Beyond software development, Alibaba is making substantial hardware investments, committing tens of billions of dollars to AI chips and data center infrastructure.

Despite these ambitious plans, Alibaba shares remain 47% below their all-time highs from October 2020. This disconnect between the company’s AI progress and its stock price suggests investors may be underestimating Alibaba’s transformation. The recent stock surge following the company’s AI roadmap announcement indicates growing recognition of this potential, but at current valuations, much of the AI opportunity may still be unpriced. While quarterly e-commerce performance may experience volatility during this transition, the long-term AI investment thesis appears compelling given the modest valuation multiple.

Often described as the Google of China, Baidu possesses a formidable data advantage that could prove decisive in the AI race. The company’s recently announced Ernie X1.1 reasoning model represents a significant technological leap, with reports suggesting it can compete with advanced Western models like OpenAI’s GPT-5 and Gemini 2.5 Pro. This development raises questions about whether the perceived plateau in large language model advancement is creating opportunities for Chinese companies to close the gap with their American rivals.

Baidu’s journey mirrors Alibaba’s, with the stock having imploded by approximately 77% from peak to trough before its recent AI-driven resurgence. Trading at just 12.4 times trailing earnings, Baidu offers one of the most attractive valuations among major AI players globally. The company’s position as China’s dominant search engine provides not only vast data resources but also multiple monetization pathways for its AI technologies. However, investors should approach with caution given the inherent volatility of Chinese stocks and consider building positions gradually during market pullbacks.

The Chinese government’s preference for domestic AI solutions creates a protected environment for companies like Alibaba and Baidu. With regulatory approval likely limited to homegrown models, these companies face reduced competition from international giants in their domestic market. This policy stance provides a significant tailwind as China accelerates its efforts to catch up in the global AI race.

The potential for surprise developments, exemplified by breakthroughs like DeepSeek, adds another dimension to the investment thesis. While the United States maintains its AI leadership position, China’s concentrated resources and government support could yield unexpected advancements. For risk-tolerant investors, the combination of discounted valuations, technological progress, and supportive policies makes Chinese AI stocks an intriguing proposition. However, the path forward will require careful monitoring of both technological developments and geopolitical dynamics that could impact these investments.