Baidu has emerged as the leading generative AI company in China. However, despite its strong position, it has not received the recognition it deserves in the stock market, mainly due to investor concerns about the future of Chinese firms. Nevertheless, Baidu's attractive valuation presents a favorable opportunity to consider investing in the company. With the rise of artificial intelligence (AI) technology, investors are closely monitoring developments in this field to identify promising investment prospects. Baidu, the Chinese internet giant listed under NASDAQ with the ticker symbol BIDU, is often overlooked as a true leader in the AI domain. Despite aggressive investments in AI, Baidu remains undervalued due to negative investor sentiment toward Chinese companies. Consequently, I am optimistic about Baidu's prospects as I believe the company is significantly undervalued. Baidu was among the pioneers in focusing on AI technology worldwide. In fact, data from CB Insights shows that Baidu first discussed AI in 2010, which was five years prior to Alphabet Inc. (Google) discussing the same technology during an earnings call in 2015. In China specifically, Baidu was the first company to prioritize AI, with Alibaba and Tencent joining in 2017 and 2016, respectively. Since 2010, Baidu has made substantial investments in developing Baidu Brain, its core AI technology powering innovative products such as autonomous driving and Ernie, its generative AI chatbot competing with OpenAI's ChatGPT. Presently, Baidu is reaping the benefits of being an AI pioneer in China, evident in Ernie chatbot's ascendancy in the generative AI sector. Recently, Baidu unveiled Ernie 4. 0, its latest generative AI model expected to directly rival OpenAI's GPT-4, as stated by the company's CEO, Robin Li. Ernie 4. 0 boasts new features and capabilities, including the ability to answer disorganized questions, create videos from minimal prompts, and solve complex geometry problems. Considering these advancements, it is reasonable to conclude that Ernie 4. 0 is on par with GPT-4 from multiple perspectives. Building on the success of Ernie 4. 0, Baidu plans to upgrade all its core products, such as Baidu Search, Baidu Maps, and Baidu GBI, using a native AI approach. This strategic move should establish Baidu as the dominant player in the generative AI sector in China, which boasts the world's largest online population, exceeding one billion active internet users. Despite Baidu being at the forefront of AI, the market has yet to fully recognize its leadership position. This lack of recognition likely stems from negative investor sentiment toward Chinese companies, intensified by rising tensions between the US and China. Baidu primarily generates revenue from advertising, with online advertising accounting for over 70% of its total revenue in 2022. To sustain growth in this core business, Baidu focuses on delivering an enhanced search experience through AI technology.

As mentioned in the second-quarter earnings call, Baidu is also exploring the possibility of charging a subscription fee in the future to provide users with AI-enabled search functions. However, Baidu's advertising business segment has faced challenges due to the emergence of new social media platforms like TikTok, owned by ByteDance. Consequently, Baidu has smartly shifted its focus to the cloud business and AI technology, making its diversification efforts promising for long-term rewards. Baidu's AI Cloud business, which contributes around 20% of core revenue, has gained momentum in recent quarters. The company empowers cloud customers to develop their high-tech products using the Ernie bot, leading to an increasing number of engagements. In the second quarter, AI Cloud revenue grew by 5% to RMB 4. 5 billion, and notable profitability was achieved in this segment. Baidu's intelligent driving platform, Apollo, is also making strides, with a 150% year-over-year increase in rights provided by Apollo Goal, reaching 714, 000 in the second quarter. Baidu now holds a total of RMB 3. 3 billion in accumulated rights, establishing itself as the leading autonomous driving technology developer in China. Currently, Baidu is valued at a forward price-to-earnings (P/E) ratio of 11. 4, making it highly attractive compared to major American big tech companies. For instance, Microsoft, the leader in generative AI technology in the Western world, is valued at a forward P/E ratio of 30. While Baidu's valuation aligns with its Chinese counterparts like Alibaba and Tencent, it is my belief that the company's AI advantages warrant a premium in the market. However, it is crucial to remain vigilant of certain risks. First, tensions between the US and China may impact Baidu's ability to access key semiconductor components required for AI-enabled products. The US government has recently imposed new export restrictions, necessitating close monitoring. Second, the policy environment for AI technology in China remains uncertain, and new policies could hinder continued sector growth. Lastly, Baidu faces challenges in its cloud, AI, and autonomous driving segments. If these segments fail to generate sufficient revenue to offset the anticipated decline in advertising revenue due to competitive pressures, the company's profitability may be at risk. Baidu is undeniably the leader in generative AI in China, transforming key products with AI integration and poised to benefit from the fusion of AI and cloud computing. Despite being attractively priced compared to its American counterparts, the valuation mismatch may not persist once geopolitical tensions ease. Typically, investors do not initially consider major gainers like TSLA or NVDA. With the influx of opinions on social media and financial blogs, discerning real growth potential from hype becomes challenging. As a result, we have developed technology over the past decade to help private investors identify the best opportunities with significant upside potential in any financial climate.