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Alibaba's Increased Focus on AI and the Impact on Chinese Stocks
Chinese e-commerce behemoth Alibaba is ushering in a new era by doubling down on artificial intelligence (AI). The management team expressed their belief in the growth potential of AI services during a recent conference call with analysts. They reported a surge in demand for training AI models on the cloud, so much so that they are unable to meet all requests due to a lack of processing power.
Alibaba's AI Ambitions and the IPO Plans for its Cloud Unit
Alibaba's cloud unit, the first of its six business divisions with clear IPO plans, is at the forefront of this AI-driven growth. The company's cloud rival, Tencent, is also expected to discuss its AI business strategies in its upcoming results report. Baidu, known for its AI-powered Ernie chatbot, is set to release its earnings report on August 22. While the demand for AI training is driving the need for Nvidia's chips, the commercial returns on AI development in the near term remain somewhat unclear.
HSBC Analysts' Take on Chinese AI Hardware Stocks
HSBC analysts are closely watching Chinese AI hardware stocks. They believe that we are still in the early stages of the AI cycle. Frank He, head of A share technology hardware research and a team at HSBC Qianhai, a majority-owned joint venture of the bank in China, emphasized the urgency to continually upgrade hardware as computational power is now doubling every three and a half months.
HSBC's Buy Ratings on Mainland China Listed Stocks
HSBC analysts have given buy ratings to three mainland China listed stocks, known as A shares. Foxconn Industrial Internet, an Nvidia supplier, is expected to benefit from AI investments from tech giants like Microsoft, Google, and Amazon. HSBC has set a price target of 33.10 yuan for Foxconn, indicating more than a 50% upside from Friday's close.
Other Stocks to Watch: Innolight and Montage
Innolight, a Suzhou-based company that manufactures optical transceivers for high-speed transmission in cloud data centers, is another stock to watch. Its clientele includes Nvidia and cloud companies from both the U.S. and China. HSBC has set a price target of 224.30 yuan for Innolight, indicating an upside of more than 80% from Friday's close.
Montage, an integrated circuit company, is expected to see a significant increase in the penetration rate of its DDR5 chip. HSBC has set a price target of 74.80 yuan for Montage, indicating nearly a 40% upside from Friday's close.
Challenges for U.S. Investors and the Future of AI
Whether U.S. investors can tap into these gains is a matter of debate as the U.S. government has blacklisted several Chinese companies, mostly state-owned, for alleged support of China's military. However, the Biden Administration's executive order and pending Treasury regulations suggest a narrow scope, indicating that investments in stocks won't be as affected as startups.
Taylor Ogan, CEO of Snow Bull Capital, relocated from the U.S. to Shenzhen, China, in January to open a research office. After visiting several companies in person and finding about a third of them uninvestable due to poor management, he decided to focus on Chinese AI and green energy companies.
Commercial Value of AI Technology
Despite geopolitical concerns, the question remains whether AI technology will merely become another buzzword over the next decade. Yuan Hui, CEO of Nasdaq-listed AI company Xiao-I, stated in June that regardless of the strength of the technology, if it cannot create commercial value, it is meaningless.
After launching a chatbot in China in the early 2000s, Xiao-I raised money from IDG and other early-stage investors. However, they found they could not simply exist as a technology leader. As a result, the company spent the last decade working on how to integrate the technology with different types of businesses, including smart homes and autonomous driving. Call centers emerged as the most viable application, according to Yuan.
Regulatory Changes and Support for AI Development in China
Despite Xiao-I's net revenue of $48.2 million in 2022 and a net loss of $6 million, the company launched what it calls China's own ChatGPT – "Hua Zang" – in late June. They are not opening it to the public en masse, remaining focused on selling customized chatbot services to businesses.
The popularity of ChatGPT has swept China, even though OpenAI's chatbot is not officially operable in the country. Beijing is closely watching these developments, and new rules taking effect on August 15 require public-facing generative AI services to protect personal data and intellectual property. However, the final version does not include a blanket license requirement, providing some relief for the industry. Top leaders have also expressed support for AI development in the country.
Implications of Alibaba's AI Focus on New Businesses
The escalating focus on AI by Alibaba, a leading player in the global tech industry, signals a significant shift in the business landscape. This could mean that new businesses, particularly those in the tech sector, will need to adapt to an increasingly AI-driven market.
Opportunities and Challenges
On the one hand, this presents considerable opportunities. The surge in demand for AI services and the growth potential highlighted by Alibaba's management indicates a fertile ground for new businesses to innovate and thrive. Particularly, startups in the AI space could ride on this wave to drive their growth.
On the other hand, the shortage of processing power and the unclear commercial returns on AI development highlight some of the challenges that new businesses might face. It's crucial for these businesses to not only focus on technological innovation but also on creating commercial value, as emphasized by Xiao-I's CEO, Yuan Hui.
In conclusion, while Alibaba's increased focus on AI and the potential growth of the AI market present exciting opportunities, new businesses must navigate the challenges carefully. They need to ensure they are not only riding the AI wave but also creating tangible commercial value. The companies that can strike this balance will be the ones that thrive in this new era.
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