Last September, I declared Alibaba (NYSE:BABA) was a better buy than Baidu (NASDAQ:BIDU). I claimed that the strength of Alibaba's core commerce business, the narrowing losses at its cloud division, and the upcoming initial public offering (IPO) of its fintech affiliate Ant Group made it the stronger overall company.
Meanwhile, Baidu's ad revenue continued to decline, its streaming-video unit iQiyi lost its momentum, and its expansion into next-gen markets like artificial intelligence (AI) and driverless cars wasn't generating much revenue yet.
But since I wrote that article, Alibaba's stock price has tumbled more than 10% as Baidu's stock price surged over 70%. Let's see why my call missed the mark and whether or not Baidu can maintain its recent momentum.
A streak of bad news crushed my bullish thesis for Alibaba
Alibaba's near-term outlook seemed stable last September, but that was the calm before the storm. In November, Ant's IPO was suspended after Jack Ma criticized China's state-backed banking system.
In December, China's antitrust regulators fined Alibaba over an unapproved acquisition, then launched an antitrust probe into its e-commerce business. The storm intensified as Alibaba faced pressure to divest its media assets, share its data with a state-backed joint venture, and hire more Chinese Communist Party members to oversee its business.
China's SAMR (State Administration for Market Regulation) recently concluded its probe by slapping Alibaba with a record $2.75 billion fine and forcing it to nix its exclusive deals with big brands. Alibaba's stock rose after the news, since it seemed like the worst was over, but it still faces other challenges.
In a separate case, Ant faces demands to restructure itself as a financial holding company that would be subject to the same regulations as state-backed banks. That transformation could curb AliPay's ability to compete against Tencent's WeChat Pay in China's fintech market.
Limits on Alibaba's future investments could also erode its dominance of China's e-commerce and cloud-platform markets. In other words, I picked the worst possible time to make a bullish call on Alibaba.
Baidu excites investors again with fresh developments
I also picked a bad time to turn my back on Baidu. The company's core online marketing business remained weak with seven-straight quarters of year-over-year revenue declines, but it suddenly impressed investors with three big announcements.
First, its guidance in February called for 15%-26% year-over-year revenue growth in the first quarter of 2021 -- which implies its online marketing business will recover alongside its expanding cloud business. That balanced growth could reduce its overall dependence on iQiyi, which remains a dead weight on its bottom line.
Second, Baidu launched a new joint venture with the Chinese automaker Geely in March to develop driverless electric vehicles. That move would complement the expansion of its autonomous platform Project Apollo, which already powers robotaxis in several Chinese cities, and its other AI initiatives.
Baidu's announcement caused its stock to rally with other EV-related stocks and SPACs amid the recent feeding frenzy in EV-related investments. Big purchases from Cathie Wood's closely watched ARK ETFs amplified Baidu's gains.
Lastly, Baidu will soon acquire the live video streaming platform YY Live from JOYY. Baidu believes the acquisition will further diversify its business and give it a foothold in China's booming live video market.
But can Baidu stay ahead of Alibaba?
Alibaba's antitrust fine is equivalent to just 3.5% of its revenue and 12% of its net income last year. That's a one-time slap on the wrist, and the impact will likely be excluded from its non-GAAP earnings.
Analysts still expect Alibaba's revenue and earnings to rise 39% and 25%, respectively, this year -- which are robust growth rates for a stock that trades at just 22 times forward earnings. However, investors should be skeptical of those estimates, since Alibaba's core businesses could still face unpredictable challenges and additional regulatory headwinds.
Analysts expect Baidu's revenue and earnings to rise 19% and 6%, respectively, this year. Its rebounding ad sales, the expansion of its Smart Mini Programs ecosystem with its mobile app, its growing cloud business, and its takeover of YY Live could all support its recovery. Baidu's stock still seems cheap at 17 times forward earnings, and it faces far less regulatory scrutiny than Alibaba.
The bottom line
Alibaba will still be closely scrutinized in the future, and the new restrictions on its exclusive deals with merchants could give JD.com and Pinduoduo a chance to poach Tmall's top brands.
Baidu still has a lot to prove, but its advertising business seems to have passed a cyclical trough as it builds the foundations for new businesses like electric vehicles, driverless cars, and AI platforms -- which could all generate meaningful revenue growth in the future.
Based on those long-term catalysts, the company's better insulation from regulatory headwinds, and the stock's low valuation, I believe Baidu will continue to outperform Alibaba for the rest of the year.