Analysts at capital markets and investment group CLSA picked three global stocks they expect will benefit from the “lucrative potential” of artificial intelligence. “We estimate the global AI market could reach $1 trillion by 2026, with generative AI, the next big driver of productivity and innovation, making up $100 billion,” the analysts said in a note last week. “The U.S. could account for some 55% (of the growth), but China is likely to be the world’s second largest AI market with over 6% share. Computing power serves as the foundation for AI development and ByteDance, Tencent, Alibaba and Baidu, as a group are the world’s second largest buyers of AI chips (12%),” they added. Referencing data from a report by the International Data Corporation, Inspur and Tsinghua University, the CLSA’s analysts highlighted that China’s AI computing power will jump eightfold by 2026. A key driver will be AI cloud services, they said . Stock picks CLSA named Baidu , Alibaba and Tencent as the “cheapest AI plays” that will “lead China’s AI innovation.” On the back of a wave of rising IT spending in China, the cloud components of the three companies are slated to see over 20% annual growth after moving away from low margin and highly customized projects, the analysts wrote. The investment house described Alibaba as “offering the best cloud infrastructure” for large language models. It estimates that the revenue of AliCloud — an Alibaba subsidiary that focuses on cloud computing — will resume a 20% three-year CAGR (compound annual growth rate), while that of its international e-commerce division will accelerate. CLSA has given Alibaba a buy call at a target price of $158, a 78.9% upside from its $88.30 close on Sept. 12. The investment house also has buy calls for fellow Chinese companies Baidu and Tencent at $184 and 500 Hong Kong dollars ($63.81) — or 33.2% and 55.3% upside — respectively. CLSA noted that “sector profit is at historical high while valuation is at historical low.” “Alibaba, Baidu and Tencent are trading at only 8.8x, 13.1x and 15.6x 24 [months] adj[usted] P/E (price-to-earnings) which only reflect the value of their traditional businesses. Cloud is essentially a free option and we estimate Alibaba’s cloud business at $94 billion, against $27 billion for Tencent and $18 billion for Baidu, which represents some 40% of Alibaba and Baidu market [capitalization] and 10% of Tencent’s,” the analysts wrote. — CNBC’s Michael Bloom contributed to this report.
