In this article, I have evaluated prominent China stocks, China-based Alibaba Group Holding Ltd. ADR (BABA) and Baidu Inc. ADR (BIDU), to determine which could generate better returns. After thoroughly evaluating these stocks, I think BABA might be a superior choice for the reasons discussed in this article.

China’s economic activity bounced back in the first quarter of this year with the removal of mobility restrictions and a surge in spending on services. Moreover, China’s GDP growth is projected to rise to 5.6% this year, led by a rebound in consumer demand.

Additionally, last month, China’s retail sales registered a 2.5% increase compared to the previous year. Industrial production also experienced a 3.7% year-over-year increase.

Moreover, BABA has gained 7.5% over the past three months compared to BIDU’s 10.2% gain. However, BABA has declined 3.3% over the past month compared to BIDU’s 5.3% decline.

Here are the reasons why I think BABA might perform better in the near term:

Recent Developments

During the recent quarter, BABA announced a series of new features for our generative AI model. Since unveiling Tongyi Qianwen in April 2023, Alibaba Cloud upgraded its audio transcription platform Tingwu with AI-powered meeting analysis capability. In July, Alibaba Cloud launched its generative AI text-to-image model Tongyi Wanxiang.

During the quarter, BABA cloud and Fudan University jointly launched one of the largest cloud-based scientific research and intelligent computing platforms for universities in China. Leveraging our AI infrastructure and services, Alibaba Cloud supports scientific research to improve efficiency and reduce cost and promotes the development and adoption of large language models in scientific research.

Conversely, on August 7, 2023, BIDU announced a significant expansion of ERNIE Bot, Baidu's knowledge-enhanced large language model (LLM), at the Wave Summit Deep Learning Developer Conference 2023 held yesterday.

With the addition of five native plugins, ERNIE Bot can now generate more rapid results, process long documents, conduct data analysis and visualization, interact with image inputs, and convert text into video.

Recent Financial Results

For the first quarter that ended June 30, 2023, BABA’s revenue increased 13.9% year-over-year to $32.29 billion. Its adjusted EBITDA grew 26.6% from the year-ago quarter to $7.18 billion. Also, the company’s non-GAAP net income and non-GAAP EPS rose 48.5% and 47.6% year-over-year to $6.20 billion and $0.30, respectively.

On the contrary, BIDU’s total revenues increased 14.9% year-over-year to RMB34.06 billion ($4.70 billion) for the fiscal second quarter that ended June 30, 2023. However, its total cost and expenses increased 9.9% year-over-year to RMB28.85 billion ($3.98 billion). Adjusted EBITDA increased 29.2% year-over-year to $9.12 billion.

Past And Expected Financial Performance

Over the past five years, BABA’s revenue grew at a 26.1% CAGR. Analysts expect BABA’s revenue to increase by 7.4% this year and 14.6% in the second quarter ending September 2023. Its EPS is expected to increase 15.1% this year and 14.6% in the current quarter ending September 2023.

Conversely, BIDU’s revenue has increased at a CAGR of 6.3% over the past five years. Its revenue is expected to increase 18.5% this year and 4.7% in the third quarter ending September 2023. Its EPS is expected to increase 18.5% this year and 3.7% in the current quarter ending September 2023.

Valuation

BABA’s forward P/S multiple of 1.72 is lower than BIDU’s 2.45. Additionally, BABA’s forward EV/Sales multiple of 1.50x is lower than BIDU’s 1.86x.

Thus, BABA is more affordable.

Profitability

BABA's trailing-12-month ROCE margin of 8.51% is higher than BIDU’s 6.74%. In addition, BABA’s trailing-12-month asset turnover ratio of 0.51x is higher than BIDU’s 0.33x.

Thus, BABA is more profitable.

POWR Ratings

BABA has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Also, BIDU has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. While both have an overall grade of B, BABA is better positioned from the Quality aspect.

BABA has a B grade in Quality. BABA’s trailing-12-month gross profit margin of 37.45% is 6% higher than the industry average of 35.32%. Its trailing-12-month EBIT margin of 14.01% is 91.2% higher than the industry average of 7.33%.

In contrast, BIDU has a C grade for Quality. BIDU’s trailing-12-month gross profit margin of 51.18% is 3.7% higher than the industry average of 49.37%. Its trailing-12-month EBIT margin of 15.88% is 86.7 higher than the industry average of 8.50%.

Among the 45 stocks in the B-rated China industry, BABA is ranked #5, while BIDU is ranked #4.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Sentiment, Stability, and Value. Get all BABA ratings here. Click here to view BIDU ratings.

The Winner

The end of Covid restrictions is helping to drive economic recovery in the Chinese Mainland.  Industry players such as BABA and BIDU are well-positioned to benefit from these tailwinds.

However, BIDU's elevated valuation multiples make its competitor BABA the better buy.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the China industry here.

What To Do Next?

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BABA shares were trading at $89.10 per share on Friday morning, down $0.01 (-0.01%). Year-to-date, BABA has gained 1.15%, versus a 15.12% rise in the benchmark S&P 500 index during the same period.

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.

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