Best Stock to Buy Right Now: Alibaba vs. Baidu

Alibaba (NYSE: BABA) and Baidu (NASDAQ: BIDU) are both bellwethers of China's tech sector. Alibaba owns the country's largest e-commerce marketplaces and cloud infrastructure platform, while Baidu owns its largest online search engine and one of its top streaming video services.

Both stocks were once considered stable investments in China's growing economy. But over the past five years, Alibaba's stock declined more than 40% as Baidu's stock dropped about 10%. Let's see why these two Chinese tech stocks lost their luster -- and find out if either one is worth buying today.

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The differences between Alibaba and Baidu

Alibaba generates most of its revenue and profits from its two largest Chinese online marketplaces, Taobao and Tmall. A smaller percentage of its revenue comes from its cloud business, which operates at lower margins than its Chinese marketplaces.

Alibaba's Chinese marketplaces face tough regulatory and competitive headwinds. In 2021, China's antitrust regulators banned Taobao and Tmall from locking in merchants with exclusive deals, using aggressive loss-leading promotions to gain new customers, and making unapproved investments and acquisitions. Those restrictions eroded its defenses against its smaller e-commerce rivals like PDD (NASDAQ: PDD) and JD.com (NASDAQ: JD).

Alibaba's other faster-growing businesses -- including its overseas marketplaces (Lazada in Southeast Asia, Trendyol in Turkey, Daraz in South Asia, and AliExpress for its cross-border purchases) and Cainiao logistics division -- are still unprofitable. Therefore, expanding those higher-growth businesses boosts its revenue but reduces its margins.

Baidu generates most of its revenue and profits by selling online search, display, and video ads across its search engine, websites, and its streaming video platform iQiyi (NASDAQ: IQ). A smaller but growing percentage of its revenue comes from its "AI Cloud" platform, which is growing faster than its advertising business but bleeding red ink.

Baidu still dominates online searches, but it faces intense competition from Tencent's (OTC: TCEHY) WeChat (Weixin) "super app", which bundles together social, search, e-commerce, delivery, and payment features for its 1.41 billion monthly active users. ByteDance's Douyin (known as TikTok overseas) is also pulling away its younger users.

To offset that pressure, Baidu is expanding its mobile app, managed business pages (which allows companies to directly edit and manage their business listings on its platform), and its AI-oriented cloud infrastructure services. That expansion might gradually reduce its dependence on traditional ads, but it also compresses its near-term operating margin.

Which company is growing faster?

From fiscal 2025 (which ended this March) to fiscal 2028, analysts expect Alibaba's revenue and earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 8% and 12%, respectively. It expects to stabilize Taobao and Tmall with AI-driven recommendations, improved merchant tools, and logistics upgrades. It also expects its cloud platform to expand as it locks in more businesses with its Qwen large language models (LLMs) for generative AI applications.

The growth of those two core profit engines should give it more breathing room to expand its lower-margin international marketplaces and Cainiao's third-party logistics services. Alibaba's high-growth days might be over, but it looks reasonably valued at 20 times next year's earnings.

From 2024 to 2027, analysts expect Baidu's revenue to grow at a CAGR of 3% as it continues to expand its AI and cloud segments while integrating its AI chatbot ERNIE (Enhanced Representation through Knowledge Integration) into more of its services. However, those analysts also expect Baidu's EPS to decline at a negative CAGR of 5% during those three years as it expands those unprofitable services. That dim outlook suggests it can't scale up those loss-leading businesses fast enough to offset the ongoing decline of its core advertising business -- so its stock doesn't seem like a bargain at 19 times next year's earnings.

The better buy: Alibaba

Alibaba and Baidu both face near-term challenges, and their stocks could stay in the penalty box as the trade war between the U.S. and China drags on. But if cooler heads prevail and those tensions ease, more investors could pivot back toward Chinese tech stocks again.

If that happens, Alibaba should be a better buy than Baidu. Both companies are sacrificing their near-term margins to boost their long-term revenue, but Alibaba's strategy looks more sustainable. Alibaba's core Chinese e-commerce businesses might be slowing down, but they're not facing an existential crisis like Baidu's online search engine. Baidu might eventually bounce back, but I wouldn't buy its beaten-down stock until a few more green shoots appear.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu and Tencent. The Motley Fool recommends Alibaba Group, JD.com, and iQIYI. The Motley Fool has a disclosure policy.