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China’s artificial intelligence stocks are soaring even as the overall market recovery remains slow. OpenAI’s Sora text-to-video product announcement came towards the end of the Chinese New Year holiday. AI stocks soared when markets reopened on February 19, as locals rushed to discuss and share the technology’s potential online. China’s equivalent of the Bloomberg terminal, Wind Information, launched the Mainland China A-share Sola Concept stock index, which rose more than 20% in a week. Other wind AI-related indices have seen similar gains over the past few days. Next week, technology giant Baidu, which Morgan Stanley calls “China’s Internet’s best AI company,” is scheduled to report its financial results. A team of investment analysts led by Gary Yu has set a price target of $140 on Baidu’s U.S.-listed shares, giving it an overweight rating. This is more than 25% higher than Baidu’s closing price on Thursday. Yu pointed out how Baidu has integrated an Ernie chatbot similar to ChatGPT with Samsung’s new smartphone Galaxy S24 and has a strategic partnership with Honor, a smartphone brand spun off from Huawei. . “We believe that Galaxy AI and Ernie’s current AI cloud integration is only the first step,” Yu said. “Although current monetization scale may be limited, we expect further expansion into other phone models and possible development into edge AI models in the long term, but this is currently an untapped market (i.e. processing of data and algorithms directly from endpoint devices without an internet connection). Baidu is expected to announce its financial results for the last three months of 2023 on Wednesday, before the US market opens. The company operates a wide range of technology businesses, including search engines, cloud services, and robotaxis.The macro environment of slowing growth in China is a headwind for Baidu’s core advertising business, while regulators are taking a closer look at AI. But that doesn’t stop companies from experimenting with AI tools. A study by benchmark analysts led by Phong Jiang found that advertisers are turning to AI-powered generative tools, in part because they’re cost-effective. Generative AI advertising is likely to contribute more than 100 million yuan ($14 million) to Baidu’s fourth-quarter results, Jiang reported on February 21. He noted that Baidu has previously indicated that it expects AI advertising revenue to bring in more than 1 billion yuan this year. We are particularly interested in trends in the average spending of existing customers who have incorporated the service,” Jiang said. Benchmark rates Baidu a buy, with a price target of $210 per share. JPMorgan China internet analyst Alex Yao has an even higher price target of $215. He predicts that generated AI advertising will bring Baidu 2 billion yuan in revenue this year, and that the total AI contribution to the company will be more than 9 billion yuan, but a report earlier this month said it is still not fully realized. It is said that it is not incorporated. Yao expects Baidu’s core advertising revenue to grow 7% this year as the economy recovers, including a boost from AI. However, for the fourth quarter of 2023, the forecast for 6% growth compared to the same period last year has been revised downward by 2 points. In his 2021 book Genius Makers: The Mavericks Who Brought AI to Google, Facebook, and The World, Cade Metz writes that Baidu collaborated with the “godfather of AI” Jeffrey Hinton more than a decade ago. It said it was an early bidder for the technology. While Hinton went to Google instead, Metz explains how Baidu has assembled comparable talent and built similar research in artificial intelligence. When Baidu announced its Ernie bot in March 2023, the company also showed off text-to-video conversion capabilities, but it remains to be seen how widely available they will be and how they will compare to Sora’s. It is unclear to what extent they are equivalent. Stocks with relatively small market capitalizations, such as Sinodata, which is traded in Shenzhen, have jumped on the SolaNews trend. The company is a Microsoft Solutions Partner for Data and AI and through Azure claims priority access to Sora’s APIs once they are released. Microsoft did not respond to requests for comment. Sinodata shares rose more than 16% in a week despite a letter of concern from the Shenzhen stock exchange that the company was misleading investors. Despite all the interest in AI stocks, Chinese markets this year are still grappling with concerns about whether the Chinese government is doing enough to support economic growth. The country replaced the head of its securities regulator just before the Lunar New Year holiday due to wild swings in mainland stocks. The regulator last week called for further crackdowns on so-called market manipulation. The S&P 500 index has already risen more than 6% since the beginning of the year, while the Shanghai Composite Stock Price Index rose more than 4% last week, reversing its 2024 losses. As of mid-February, weekly inflows into Chinese stocks were above the recent average, according to EPFR data. Net inflows into Chinese stock funds so far this year have been about $45.7 billion, more than half of the $77.56 billion in net inflows for all of 2023, according to EPFR. However, US regulations create both risks and opportunities regarding China-related AI. Nvidia’s latest financial results showed that its sales in China have fallen to single digits as a percentage of its data center business, down from more than 20% a few months ago. Baidu’s stock price fell last month after reports that the company was involved in testing publicly disclosed AI systems by the Chinese military, but the company said it had no business partnership. Bernstein analysts expect local AI chip companies to be able to meet almost all domestic demand for high-end semiconductors over the next two years. “We like Cambricon as the best alternative to Huawei in China,” the analysts said in a report in late January. They have a price target of 160 yuan for Cambricon’s Shanghai-listed shares, up 12% from Friday’s level. Huawei is not listed. Bernstein analysts rate Baidu as Outperform and set a price target of $140. We also like Kingsoft Office, which incorporates generative AI into consumer software. “Kingsoft Office stands out as a player with a product ready for a big launch, but monetization still needs to be proven,” Bernstein analysts said. Shanghai-listed Kingsoft’s price target is 380 yuan, up more than 50% from Friday’s level.
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