Baidu Just Gained Shanghai and Shenzhen Stock Connect Access. Is It Now a Better AI Bet Than Alibaba?

The recent inclusion of Baidu’s Hong Kong Class A shares in both the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs has reignited debate about its attractiveness as an AI investment. For months, investors have been torn between Baidu and Alibaba, two Chinese giants pursuing artificial intelligence through distinct strategies.

Baidu’s dual-primary listing structure has long been a point of contention among investors. The company’s decision to maintain a strong presence in both Hong Kong and mainland China has made it easier for domestic investors to participate in its growth story. With Stock Connect, eligible mainland investors now have direct access to Baidu’s Hong Kong listing, potentially widening liquidity and expanding the shareholder base.

However, improved trading access does little to address concerns surrounding Baidu’s advertising business, cloud services growth, or geopolitical and regulatory risks. These issues remain pressing for investors, who are still trying to gauge the company’s ability to deliver on its AI ambitions. Meanwhile, Alibaba continues to demonstrate its strength in AI Cloud and Compute Services revenue, which reached $7.1 billion in the June quarter, a 45% year-over-year increase.

The divergent paths taken by these two companies have sparked intense debate among investors. Baidu’s bull case is built around its Ernie ecosystem, cloud services, and Kunlunxin chips, while Alibaba’s bull case revolves around its full-stack approach to AI, spanning models, cloud infrastructure, proprietary chips, and commerce distribution. However, this approach also comes with significant risks, including capital intensity, fierce domestic competition, exposure to consumer spending, and the possibility that fast AI growth remains too small to transform the larger group’s valuation.

Baidu’s lack of clear revenue growth in its core advertising business has contributed significantly to its bear case. While the company continues to invest heavily in AI research and development, its ability to translate this into tangible returns remains uncertain. In contrast, Alibaba’s cloud services have shown remarkable resilience, with a 133% year-over-year increase in segment adjusted EBITA.

The impact of Stock Connect on Baidu’s valuation will likely be observed through changes in cross-market volume and price discovery. While the catalyst is real, its transmission into earnings remains unproven. As investors weigh their options between these two AI giants, it is essential to remember that Baidu’s U.S. depositary shares and Hong Kong ordinary shares are linked but not identical instruments.

Ultimately, the question of which company emerges as the better investment remains unanswered. While Stock Connect has provided a much-needed boost to Baidu’s liquidity, it does little to address the fundamental concerns surrounding its AI strategy. As investors continue to grapple with these complexities, one thing is clear: the landscape for AI investments in China has never been more complex or nuanced.

The stakes are high, and the outcome uncertain. The true test of Baidu’s and Alibaba’s AI ambitions lies not in their access to trading platforms but in their ability to deliver tangible returns on investment.