We recently compiled a list of the 10 Best Chinese Stocks to Buy Right Now. In this article, we are going to take a look at where Baidu, Inc. (NASDAQ:BIDU) stands against the other Chinese stocks.
Nearly every major equity market is up for the year owing to improved investor sentiments. However, it is an exception for Chinese equity markets that continue to underperform while hovering near the zero-COVID lockdown valuations of three years ago.
Over the past three years, about $6 trillion has been wiped off the value of Chinese stocks. The global index compiler MSCI has already announced plans to remove up to 60 Chinese stocks from its gauges as it responds to the underperformance of recent years. The cut will signify the waning need and demand for some of the country’s equities to overseas investor’s portfolios. Amid the cuts, the index will still keep hold of some of the best Chinese stocks to buy now.
READ ALSO: 10 Best Oilfield Services Stocks to Buy Now and 7 Best Debt Free Stocks To Buy.
The underperformance comes amid growing concerns about the Chinese economy, which continues to send jitters to the investment community. The Chinese economy has always outperformed the US economy, increasing by 123% between 2012 and 2022, compared to 58% for the US.
Nevertheless, the Chinese economy has struggled in recent years amid a myriad of problems, including a downturn in the real estate sector, deflation, high debt levels, and a shift in ideology-driven policies that are scaring away foreign firms from the economy.
While the economy grew by 5.2% last year, much higher than 2.5% for the US, it was the lowest pace of growth since 1990, with the exception of the pandemic period. While economists expected the economy to slow even further in 2024, with growth averaging 4.5%, it has started showing signs of recovery. The Chinese economy grew 5.3% in the first quarter and 4.7% in the second quarter.
Nevertheless, the 4.7% growth in the second quarter, while reasonable, is far below the country’s double-digit growth rates in the past decades, which is a major point of concern in the equity markets. On the other hand, the slowdown in economic growth is not the only headwind that scares investors from the Chinese economy.
Deteriorating US-China relations has always rattled investors’ sentiments. With the US hitting Chinese firms with trade tariffs and restricting access to some key technologies, China has also hit back with its fair share of tariffs. The tariff hike on Chinese electric vehicles from 25% to 100% and the imposition of trade tariffs on $18 billion worth of imports underline the ever-deteriorating relations between the two economic powerhouses.
Amid the deteriorating macroeconomics, Chinese stocks have started showing signs of recovering in the second half of the year. Some of the promising sectors include the fixed asset investments sector, which is driven by faster manufacturing and infrastructure investment. Additionally, industrial production and services are also on the rise while playing host to some of the best Chinese stocks to buy.
In July, global hedge funds added holdings of some of the best Chinese stocks to buy now as most took advantage of their depressed valuations after steep pullbacks. Nevertheless, the hedge fund positions holdings remain near a five year low.
Additionally, analysts at BCA Research believe Chinese equities could insulate fund managers from deep losses as global risk assets face fresh dangers. The firm has already upgraded Chinese onshore equities to overweight from neutral.
“We expect Chinese stocks to fall by less than or as much as their global and EM peers in a bear market,” analysts, including chief China strategist Arthur Budaghyan, said in the report. Potential market support from Chinese state-owned funds could temper potential declines, he added.
As the economic situation in China improves and sentiments in the equity market improve, now could be the best time to pay close watch to the best Chinese stocks to buy, likely to outperform heading into year-end.
Our Methodology
To compile the list of the 10 best Chinese stocks to buy now, we scanned through the top 50 companies listed on the US stock exchange from the iShares MSCI China ETF. Analysts believe these companies have significant upside potential. Once we had a consolidated list, we ranked the best Chinese stocks in ascending order of their upside potential, as of August 17.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A modern internet space with a person using Baidu services on a laptop.
Baidu, Inc. (NASDAQ:BIDU)
Hedge Funds Holding Stakes: 42
Stock Upside Potential: 68.22%
Baidu, Inc. (NASDAQ:BIDU) is a Chinese tech giant that provides internet search services. The company offers access to Internet search services and other services in China. It generates most of its revenues from advertising and operating the biggest search engine in China. In addition, Baidu, Inc. (NASDAQ:BIDU) offers online marketing services that include pay-for-performance and auction-based services.
In the first quarter of 2024, Baidu, Inc. (NASDAQ:BIDU) announced an earnings of 31.513 billion Yuan (approximately $4.37 billion), a 1% increase from the previous year. Meanwhile, its adjusted net income rose to 7.01 billion Yuan ($971 billion), showing a growth of about 22% from the previous year.
This expansion was mainly attributed to the company’s digital marketing division, which sells advertising space. The demand for search advertising and digital marketing services in China saw a modest increase as more businesses began to focus their marketing efforts online following China’s economic revival.
In China, Baidu, Inc. (NASDAQ:BIDU) is often seen as a leader in artificial intelligence, boasting a search engine and autonomous taxi division named Apollo Go, which affirms why it is one of the best Chinese stocks to buy.
In the first quarter, earnings from sources other than marketing increased to 6.8 billion Yuan ($935 million), marking a 6% growth compared to the same period the previous year, with the bulk of this increase attributed to its AI Cloud division.
Although the cloud division might face challenges as companies reduce their IT budgets due to an uncertain economic climate, our attention will be primarily on the success of the AI division.
Baidu, Inc. (NASDAQ:BIDU) is currently rated as a Buy, with analysts maintaining an average price target of $141.29, implying a 68.22% upside potential from current levels. Likewise, 42 out of 920 hedge funds tracked by Insider Monkey held stakes in the companies as of the end of the second quarter.
Here is what Ariel Global Fund said about Baidu, Inc. (NASDAQ:BIDU) in its first quarter 2024 investor letter:
“Alternatively, several positions weighed on performance. China’s internet search and online community leader, Baidu, Inc. traded lower alongside Chinese equities as intensifying problems in China weighed on investor sentiment during the period. The company continues to invest heavily in Artificial Intelligence (AI) and recently launched its generative AI, Ernie Bot, aimed at rivaling Open AI’s ChatGPT. While monetization of the new technology is largely dependent on regulatory review, we think Baidu should continue to experience margin improvement with the ongoing implementation of efficiency and profitability initiatives. While some investors remain on the sidelines due to uncertainty surrounding China’s economic growth, government regulations, and the political rhetoric towards Taiwan, we remain enthusiastic about Baidu’s longer-term opportunity for revenue growth and margin expansion across internet search, cloud, autonomous driving, artificial intelligence and online video.”
Overall BIDU ranks 2nd on our list of the best Chinese stocks to buy. While we acknowledge the potential of BIDU as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BIDU, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.
