Baidu’s $23 Billion Rally May See Boost On ChatGPT Rival Launch

(Bloomberg) -- China's leading internet search provider Baidu Inc. may get a fresh tailwind from the sooner-than-expected launch of its ChatGPT-like Ernie Bot, reigniting a rally that boosted its market valuation by $23 billion from last year's trough.

Baidu made its artificial intelligence service available to the public last Thursday, capping a two-week surge in its US-listed stock after the company's surprisingly strong quarterly results. While China approved several firms' services, Ernie Bot quickly attracted 1 million users and surged to the top of the nation's app rankings.

“For Baidu, this is undoubtedly a positive surprise, with market participants and businesses all expecting approvals to come at a later date,” Boris Van, an analyst at Sanford C. Bernstein & Co., wrote in a note. “Baidu's head start should give them a bigger advantage,” they added.

Baidu, SenseTime Among First Firms to Win China AI Approval

Outside of the largely uninterrupted climb in Nvidia Corp., other stocks riding the AI theme have seen big fluctuations as the market tries to gauge the financial impact of the technology. AI hopes helped Baidu shares more than double in just about four months from an October low before doubts emerged about the company's ability to deliver its service to market, paring the big gains.

Baidu's American depositary receipts are still down more than 10% from their February high, but the bulls appear to be back. Call option volume surged Thursday in the US after the launch announcement as investors bet on future gains in the company's shares. That sank its put-to-call ratio to the lowest since June, according to data complied by Bloomberg. 

Some technical signs of overheating reemerged with the latest bounce, and doubts remain about how quickly AI will feed through to company earnings. More competition is on the way as well, with Iflytek Co. launching a service on Tuesday and Tencent Holdings Ltd.'s AI model slated to launch later this year.

“We do not expect any immediate monetization or contribution to revenues that is material to our estimates,” said Kai Wang, an analyst at Morningstar Inc. Baidu, SenseTime Group Inc. and other companies in the first batch of approvals will get “an early mover advantage where they are able to fine-tune their products ahead of time compared to others.”

JPMorgan Chase & Co. is more bullish, expecting an overall sentiment lift for major Chinese internet stocks from the registration of AI-generated content services, and a “much more positive” impact on share price and earnings for Baidu than for Tencent and Alibaba Group Holdings Ltd. Baidu has outperformed its larger peers in the rally over the past 10 months.

“We believe Baidu is currently the best investment proxy to China's AIGC development,” JPMorgan analysts including Alex Yao wrote in a report.

While there has been much talk of an AI bubble, Goldman Sachs Group Inc. says the early winners have strong fundamentals and less extreme valuations compared with stocks seen in previous periods of market exuberance. Baidu is trading at 14 times estimated earnings for the next 12 months, well below its 10-year average of 21 times.

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