Why Chinese Internet Stocks Like Alibaba and Baidu Offer Undervalued AI Exposure Amid Global Competition

Alibaba's AI strategy is anchored in building scalable infrastructure to meet surging demand. The company plans to allocate over CNY 380 billion to AI-related initiatives through 2025, with capital expenditures averaging annually, a move that Morningstar report calls "a strategic shift toward AI infrastructure." This includes partnerships with Nvidia to develop physical AI capabilities, expansion of overseas data centers, and advancements in self-developed chips. These efforts are already paying off: Alibaba's cloud revenue is projected to grow significantly, driven by enterprise demand for AI tools and open-source models like Qwen3-Max, which analysts claim rivals GPT-5 and Claude Opus 4, as noted in a Yahoo Finance report.

The stock's valuation further underscores its appeal. Despite a 50% surge in Hong Kong-listed shares in September 2025, Alibaba trades at just , a discount compared to global peers like Amazon (28x) and Microsoft (32x), as noted in the Yahoo Finance report. Morningstar has raised its fair value estimate to , , citing stronger cloud profits and reduced holding discounts, as reported in the Morningstar report. This suggests investors are still underestimating Alibaba's transition from e-commerce to AI-driven infrastructure.

Baidu: Diversifying Revenue Through AI and Autonomous Innovation

Baidu's strategic pivot toward AI is equally compelling. In Q2 2025, its AI Cloud business drove 34% year-over-year growth in non-online marketing revenue, , according to the Morningstar report. This diversification is critical: the company is no longer reliant on traditional advertising but is now capitalizing on enterprise AI solutions and autonomous driving. Apollo Go, Baidu's self-driving unit, delivered in the same quarter and expanded to 16 cities globally, as reported in the Morningstar report.

Baidu's focus on AI transformation across its mobile ecosystem positions it to benefit from China's accelerating digitalization. Unlike Alibaba, which emphasizes global cloud infrastructure, Baidu is tailoring its AI tools to domestic markets, including healthcare, finance, and smart cities. This localized approach could insulate it from geopolitical risks while capturing a growing share of China's AI-as-a-service market.

Strategic Diversification: A Hedge Against Global Volatility

Both companies exemplify strategic diversification in AI investing. Alibaba's global infrastructure bets and Baidu's localized AI solutions create complementary strengths. Their valuations reflect a market that still views them through the lens of their e-commerce origins, rather than their AI potential. For instance, Alibaba's cash and investments account for 49% of its market cap, yet its stock remains undervalued relative to its cloud and AI growth prospects, as detailed in the Morningstar report. Similarly, Baidu's AI Cloud revenue now constitutes a meaningful portion of its earnings, yet the stock trades at a discount to its U.S. counterparts.

This undervaluation is partly due to lingering concerns about China's regulatory environment. However, both companies are mitigating risks by expanding overseas and forming partnerships with global firms like Nvidia. As AI adoption accelerates, their diversified strategies could outperform more concentrated bets on U.S. or European tech stocks.

Conclusion: A Case for Rebalancing AI Portfolios

Alibaba and Baidu offer a unique combination of aggressive AI investment, strategic diversification, and attractive valuations. While global investors fixate on Silicon Valley, these Chinese tech giants are building the infrastructure and ecosystems that will power the next phase of AI innovation. For investors seeking exposure to AI without overpaying for hype, Alibaba and Baidu represent a compelling, underappreciated opportunity.