Morgan Stanley says A.I. in China is at an inflection point — and names 3 stocks to play it

Published Thu, Jun 22 20237:56 PM EDT

China's artificial intelligence evolution is at an "inflection point" — and the country is catching up with the U.S., according to Morgan Stanley. In fact, the bank estimates there's a $7.4 trillion AI opportunity in China. "We believe China's AI evolution is at an inflection point, set to drive consumer behavioral change and business transformation, and more important, accelerate tech diffusion across the economy," the bank said in a June 19 report. Morgan Stanley said a mass adoption of AI applications is set to drive further digitalization of business-to-consumer and business-to-business transactions — in addition to the productivity boost it will give the economy. That's set to benefit some big Chinese tech names which are also listed in the United States. Stock picks The bank named e-commerce giant Alibaba , internet services firms Baidu and Tencent , which it described as "AI enablers," given "their willingness/capabilities to invest and rich proprietary data resources." When it comes to cloud services, Alibaba has the highest market share at around 40%, Tencent has 10-20% and Baidu has 5%, according to Morgan Stanley. All three also have, or are rushing to develop, AI chatbots in response to the wildly popular ChatGPT. Morgan Stanley, in a separate note, flagged Baidu in particular as the best AI play in China, and the "most obvious beneficiary" of the $7.4 trillion AI opportunity in China. "It is one of the very few cloud service providers that has built a full-stack cloud framework, providing AI offerings from hardware, frame-works and models to industry applications ... Baidu has also proven its solid AI abilities by extending such technology to intelligent driving. It already runs the largest robotaxi fleet globally and has established autonomous driving OEM partnerships," the bank's analysts wrote. Baidu, China's largest search engine, owns the most extensive proprietary search data — and it's essential for the development of AI-generated content, Morgan Stanley noted. "Being the first player to launch a ChatGPT-type product in China, Baidu enjoys early mover advantage, not only in terms of better model training but also increasing potential switching costs for enterprises once they have integrated with Baidu Cloud," the bank said, referring to its chatbot Ernie. It also pointed to Baidu's willingness to continue research and development investments in AI. The outlook for Baidu's revenue growth is improving, the bank added, saying its non-marketing growth has been picking up — from 12% of the revenue mix in 2019, to 30% in 2022. Morgan Stanley predicts that growth will be close to 50% in the next three to five years. For 2025, it predicts that there will be a 12% upside to Baidu's core revenue estimates. Morgan Stanley gave Baidu a target price of $190, or 35% potential upside. — CNBC's Michael Bloom contributed to this report.