We recently published a list titled 10 Best AI Stocks With More Upside on $1.2 Trillion AI “Value Creation Opportunity”. Since Baidu Inc (NASDAQ:BIDU) ranks 1oth in the list, it deserves a deeper look.
UBS Global Wealth Management’s (GWM) recently published a detailed report discussing different layers of the AI “value chain,” estimating the combined market value opportunity from the layers at $1.2 trillion by 2027.
UBS segments the AI market into three layers – Enabling Layer, Intelligence Layer and Application Layer. The enabling layer is what actually powers the AI ecosystem — infrastructure, GPUs, data centers, Cloud, servers. UBS further divided this layer into two segments, Infrastructure and Cloud. The firm expects a combined $516 billion revenue opportunity from the enabling layer by 2027.
Next up is the intelligence layer, which acts as the brain of the entire AI ecosystem. Large language models and backed software systems sit at this layer. UBS estimates that this layer presents a $225 billion opportunity by 2027.
The third layer in the AI market highlighted by UBS is the application layer. This is where the end user comes in. Cloud, data centers, GPUs, LLMs and algorithms amount to nothing if the end user cannot benefit from their huge processing power. UBS said estimating monetization opportunity of this layer was the hardest since it’s still in its very early stage. The application layer addresses actual AI software used by customers — think AI assistants, GitHub CoPilot, marketing, customer service software, etc. UBS expects a whopping $395 billion in revenue opportunities for the application layer by 2027.
Key AI Predictions
The UBS report also made key “predictions” about the AI landscape. The firm’s analysts believe the race to achieve artificial general intelligence (AGI) could give rise to a “capex cycle” that could “inflate” the AI investment bubble. UBS sees the dominance of a few companies in the AI industry will continue to be a reality moving forward, as it expects “monolithic players” and “AI foundries” prevailing in the near future.
Based on this report, let’s take a look at the top companies that will directly benefit from this $1.16 trillion opportunity by 2027. For this article we analyzed UBS analysis and picked 10 stocks that are directly exposed to the three layers in the AI ecosystem highlighted by UBS in its latest report. These companies are positioned extremely well to benefit from the monetization opportunities in the enabling, intelligence and application layers of the AI market. With each stock we have mentioned the number of hedge fund investors. Why are we interested in 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).
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Baidu Inc (NASDAQ:BIDU)
Number of Hedge Fund Investors: 48
According to UBS, Baidu Inc’s (NASDAQ:BIDU) Cloud platform Wangpan positions the company to benefit from the AI spending in the enabling layer, while its Ernie bot is what qualifies the company to profit in the intelligence layer in the AI value chain. In the application layer of the AI ecosystem, UBS highlighted Comate, Baidu Inc’s (NASDAQ:BIDU) programming aided tool based on its large language model ERNIE.
Baidu Inc (NASDAQ:BIDU) is a Chinese internet giant often known as the “Google of China.” Baidu Inc’s (NASDAQ:BIDU) business has two main segments: Baidu core, its PPC ads platform, and iQIYI (IQ), its video streaming platform. Baidu Inc (NASDAQ:BIDU) Core in the first quarter saw revenue growth of 4% while its adjusted operating margin came in at 23.5%. Baidu AI Cloud’s revenue in the period jumped 12%. Baidu Inc’s (NASDAQ:BIDU) business is highly diversified. The company has a portfolio of 12 apps, including Baidu App, Ernie Bot and Baidu Post. Its autonomous driving and EV initiatives are also bearing fruit. Baidu Inc (NASDAQ:BIDU) recently said its Apollo Go robotaxi arm is close to breaking even and likely to turn a profit in 2025.
Baidu Inc (NASDAQ:BIDU) bulls believe the stock is trading at an attractive valuation. Baidu Inc (NASDAQ:BIDU) has generated FCF of about $3.5 billion over the past 12 months. Analysts expect Baidu’s earnings to grow 20% over the next 12 months and rise further in 2026. The stock is trading at a forward P/E ratio of 8.26, much lower than the industry average of 12.62 and also Baidu Inc’s (NASDAQ:BIDU) five-year average P/E of 16.82.
Ariel Global Fund stated the following regarding 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, Baidu Inc (NASDAQ:BIDU) ranks 10th on Insider Monkey’s list titled 10 Best AI Stocks With More Upside on $1.2 Trillion AI “Value Creation Opportunity”. While we acknowledge the potential of Baidu Inc (NASDAQ:BIDU), our conviction lies in the belief that some 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 Baidu Inc (NASDAQ:BIDU) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
