Apple’s AI Dilemma: 3 Chinese Stocks That Could Fill the Gap

Stocks to buy

There was a great deal of uncertainty surrounding Apple (NASDAQ:AAPL) and its AI strategy (or lack of one) entering this year. With the first half now over, investors now have more understanding of where Apple is headed in the AI age. Indeed, the Cupertino-based innovator is shooting for intelligence (note the lack of “artificial”) that’s not only useful and applied, but safe and private. Indeed, perhaps a slow and deliberate approach could be a strike of brilliance.

For now, Apple has chosen to partner with OpenAI to integrate ChatGPT into Apple Intelligence. In the future, Apple users will likely have more than one large language model (LLM) to pick from.

In China, a huge market for Apple, there won’t be a ChatGPT-powered iOS 18 coming later this year. According to the Wall Street Journal, Apple is looking to pair up with a Chinese AI firm to bring a local LLM to the Chinese iPhone-using public. These are three powerful candidates with whom Apple may wish to strike a deal.

Baidu (BIDU)

Baidu (NASDAQ:BIDU) would be an excellent Chinese internet firm to partner to bring AI to the Chinese masses. The company’s Ernie bot is comparable to ChatGPT but has one notable difference: it’s trained to comply with the Cyberspace Administration of China. Undoubtedly, having an LLM that plays by the rules of Chinese regulators is paramount. If an AI model doesn’t play by their rules, it could easily get shut down, and the firm behind the model could receive stiff fines.

Undoubtedly, the high degree of regulatory risk makes releasing an in-house LLM so risky for Apple. The good news is that teaming up with a third party like Baidu would offshore a great deal of that risk.

Apart from Ernie AI’s smarts, BIDU stock looks to be trading at a fat discount with a trailing price-to-earnings ratio of 11.8x. Even if Baidu doesn’t win a deal with Apple, its latest version of Ernie (4.0 Turbo) could have the potential to be a profound success. It already has 300 million users.

Alibaba (BABA)

Source: Nopparat Khokthong / Shutterstock.com

Like Baidu, Alibaba (NASDAQ:BABA) is a Chinese tech company that’s lost its way. After having shed more than 75% of its value, BABA stock looks severely undervalued deep-value for investors seeking growth from AI and e-commerce. With a P/E of 17.1, BABA is also much cheaper than comparable firms in the U.S. market.

With experience integrating AI across different products, perhaps Alibaba is a strong candidate to team up with the iPhone maker. It’s not just Alibaba’s LLM, Tongyi Qianwen, that’s impressive, but the firm’s ability to tailor AI to specific applications that may make an Alibaba-powered Apple Intelligence experience that much more delightful.

Undoubtedly, a deal with Apple would mean wonders for the stock. However, Alibaba needs to prove it’s a cut above rivals. The company has shown it’s “all-in” on AI, with its own models, integrations, and investment in other AI startups, including Beijing’s Baichuan AI. And let’s not forget about Alibaba’s impressive cloud expertise, which would likely be an asset in Apple’s eyes.

Tencent Holdings (TCEHY)

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Tencent Holdings (OTCMKTS:TCEHY) is another internet juggernaut looking to place big bets on China’s AI future. Like Alibaba, Tencent also helped fund Baichuan AI, a firm that may have the Chinese AI model to beat.

Tencent’s intelligent network, Xingmai, may set Tencent apart from the pack when Apple finally decides. Of course, only time will tell which AI firm wins the right to be in the next generation of AI-enabled Chinese iPhones, iPads, and Vision Pros.

The main reason for owning the stock has to be the impressive video-gaming exposure. Though Tencent must play within Chinese regulators’ rules, I appreciate the company’s ability to engage and monetize with its intriguing mobile gaming titles. At 29.4x trailing P/E, perhaps TCEHY stock is the best all-around Chinese stock to hold for the long haul.

On the date of publication, Joey Frenette held a LONG position in AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor held a LONG position in AAPL.

Joey Frenette is a seasoned investment writer specializing in technology and consumer stocks. Contributing to the Motley Fool Canada, TipRanks, and Barchart, Joey excels in spotting mispriced stocks with long-term growth potential in a fast-paced market.

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