Better Growth Stock: Baidu vs. Alibaba | The Motley Fool (2024)

Baidu (BIDU -0.50%) and Alibaba (BABA -0.94%) were both once considered relatively safe plays on the Chinese economy's long-term growth. Baidu owns the country's leading search engine, while Alibaba operates its largest e-commerce marketplaces and its most widely used cloud infrastructure platform.

But over the past three years, Baidu's stock declined 60% as Alibaba's stock sank 68%. Let's see why these two Chinese tech stalwarts stumbled, and if either one is still worth buying as a turnaround play.

Baidu's core business is maturing

Baidu still controls 60% of China's search market, according to StatCounter, but it faces fierce competition from other popular platforms like Tencent's Weixin (called WeChat overseas), ByteDance's Douyin (known as TikTok overseas), and Alibaba's e-commerce marketplaces, which all offer their own integrated search tools.

Baidu is trying to counter that trend by expanding its Managed Business Pages, which enable companies to run their own online stores and websites within Baidu's ecosystem, and expanding its namesake mobile app into an all-in-one "super app" like Weixin. Baidu is also upgrading its cloud infrastructure platform to reduce its long-term dependence on online ads, and the company is investing in the AI market's secular growth with its Ernie natural language processing platform, generative AI services, and its Apollo driverless vehicle platform. Its streaming video platform iQiyi also finally turned profitable in 2023.

Those are all steps in the right direction, but Baidu still generated more than half of its revenue from its online marketing business in 2023. The company's total revenue rose 6% for the year, but that marked a major improvement from its 8% decline in 2022. For 2024, analysts expect Baidu's revenue and earnings to rise 8% and 15%, respectively. The company's advertising and cloud businesses should stabilize as China's macro environment improves, and Baidu stock looks cheap at 12 times forward earnings.

Alibaba's business is recovering

Alibaba's headaches started after China's antitrust regulators cracked down on its e-commerce platforms in 2021. The company was hit with a record $2.75 billion fine and forced to end its exclusive deals with merchants, limit its promotional strategies, and seek the government's approval for any major investments or acquisitions.

Those draconian restrictions narrowed Alibaba's moat against its aggressive competitors like PDD and JD.com. China's economic slowdown and unpredictable "zero COVID" lockdowns exacerbated that pressure. Alibaba's cloud business also struggled with sluggish enterprise spending and its declining revenue from ByteDance, which shifted the data of TikTok's U.S. users to Oracle's servers in 2022.

Alibaba's revenue rose only 2% in fiscal 2023 (which ended last March), compared to its 19% growth in fiscal 2022. However, analysts expect its revenue and earnings to rise 9% and 45%, respectively, in fiscal 2024 as two tailwinds kick in.

First, the company expects the expansion of its higher-growth overseas e-commerce business -- which houses its Southeast Asia marketplace Lazada, its Turkey marketplace Trendyol, and its cross-border marketplace AliExpress -- to offset the slower growth of Taobao and Tmall in China. Second, Alibaba is expanding its Cainiao logistics division with more services for third-party customers to boost its sales and operating margins. Alibaba stock also looks like a bargain at eleven times forward earnings.

Both companies face regulatory challenges

Baidu and Alibaba should both overcome their recent slowdowns, but their stocks still trade at low valuations because they face unpredictable regulatory challenges in the U.S. and China.

For example, the recent export curbs on advanced AI chips to China could make it harder for both companies to expand their AI and cloud ecosystems. Both tech giants could also face additional pressure from China's antitrust regulators as they expand their businesses.

Unless Baidu and Alibaba definitively overcome those challenges, their stocks could continue to trade at steep discounts to their American counterparts.

The better buy: Baidu

I'm not a fan of either of these stocks right now, since it's easier to find better growth plays in the U.S. market with fewer regulatory issues. But if I had to choose one, I'd buy Baidu -- its growth rates are more stable, it faces less scrutiny from China's antitrust regulators, and its business is better diversified. Alibaba needs to stabilize its Chinese e-commerce and cloud businesses instead of repeatedly touting its overseas growth before I consider it to be an undervalued growth play again.