Many of the hottest artificial intelligence (AI) stocks are trading at high valuations, which can dissuade investors. Whether it's Nvidia, Alphabet, or Microsoft, these types of stocks are trading either at or near their all-time highs.
But there is one AI stock that hasn't been getting much love from investors of late, and it's one that could have some serious upside: Baidu (BIDU +5.46%).
NASDAQ: BIDU
Key Data Points
Baidu's chatbot now has more users than ChatGPT
By now, you've likely heard of ChatGPT, Gemini, and Claude. Those are some of the most popular chatbots that are backed by big tech companies in a battle for market share in the future. But there's one lesser-known chatbot that you shouldn't overlook, and that's Ernie.
Ernie is Baidu's chatbot, and it has been around for more than a year. Recently, it hit 200 million users, even more than the 180 million users ChatGPT reportedly has. And with it potentially being the chatbot of choice for the Chinese market, there could be many more users signing up to use Ernie in the future.
Could Baidu's growth get a boost from Ernie?
Baidu has a solid business that often is compared to Alphabet's because it has a popular search engine, a cloud business, and other segments to help make for a more diversified investment. Last year, Baidu reported just under $19 billion in sales, up 9% year over year. And operating income of $3.1 billion increased by 37%.
The company's growth rate, however, could potentially accelerate if Ernie can prove to be a top chatbot in China. Baidu has a professional plan for Ernie that costs users $8 a month, lower than ChatGPT-4's $20 a month. If the chatbot can help get Baidu's growth rate back up into double digits, it could be the catalyst that the stock needs to start a much-needed rally.
Baidu trades at a discount to other AI stocks
Investors have been fairly bearish on Baidu's stock; over the past year, it has fallen by 22%. And when looking at its price-to-earnings (P/E) multiple compared with other AI stocks, it becomes clear just how heavily discounted the stock is right now.
NVDA PE ratio data by YCharts.
The stock does come with risk, however
If it was just a matter of valuation, Baidu would be a no-brainer buy at this point. But investors are concerned about the potential influence the Chinese government could have over the company, and what it could mean for Baidu's growth prospects, particularly when it comes to Ernie.
There are concerns, for example, that Baidu might have close ties to the government, and that Ernie could be linked to military-related research.
There are two big issues I see here. The first is that if there is a close link to the government, that could affect the scale of what Ernie can do, and thus how useful, objective, and insightful its answers would be to users.
The second is that users might have privacy-related concerns that inhibit the chatbot's potential growth. While that's not a new issue for chatbots in general, if there are fears the information could end up in the hands of the Chinese government, that could only exacerbate those concerns.
Should you invest in Baidu's stock?
Ernie's user numbers look impressive, but it's not the most important metric for investors. What matters is the top and bottom lines, and whether Ernie will be a big growth catalyst for Baidu is the big question.
If it is a growth catalyst, this could be a fantastic growth stock. But if that doesn't turn out to be the case and Baidu's revenue growth remains in the single digits, then it might be difficult for the stock to command a higher valuation.
Baidu is a promising stock, but given the risks, I would take a wait-and-see approach on whether Ernie can continue accumulating users and whether it will lead to stronger revenue. There are, after all, many good growth stocks to consider right now, and Baidu might not be discounted enough to compensate investors for the uncertainty ahead.
