Top AI plays: Baidu is the 'Google of China'

The tech sector has been inundated with companies looking to tap into AI. Roundhill Investments Chief Strategy Officer Dave Mazza joins Yahoo Finance for Good Buy or Goodbye, giving investors tips for navigating the ever-growing AI arena.

Mazza rates Baidu (BIDU) a "good buy" citing its diversified business model, strong presence in the Chinese market, and attractive current valuation. The strategist notes that Baidu is actively investing and expanding its generative AI capabilities: the company's Ernie bot, a Chinese language model, serves as a powerful example. Arm Holdings (ARM) is Mazza's "goodbye," given its possibly overstated AI opportunities amid intense competition in the sector.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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JULIE HYMAN: It's a big, noisy universe of stocks out there. Welcome to "Good Buy or Goodbye." Our goal? To help cut through that noise to navigate the best moves for your portfolio. Of course, the tech space has been inundated with companies looking to tap into generative AI, but what's the best way to play this ever-growing AI arena?

I'm here with Dave Mazza, Roundhill Investments' chief strategy officer. Dave, thanks for being here. Appreciate it.

DAVE MAZZA: Thank for having me.

JULIE HYMAN: So let's get to your buy stock, and it is Baidu. Baidu, interesting here. Don't hear too many folks-- too many folks talking about Chinese AI plays right now, but let's get into it and why you like it. First of all, you say it's got a diversified business model.

DAVE MAZZA: Indeed. So Baidu known as the Google of China, and by that it means obviously a core part is their search business, but they're involved with a little bit of everything, including autonomous vehicles and generative AI. Of course, the background, as we saw with that chart, has been pretty challenging. If we were to look at a longer-term chart, wouldn't be much prettier either.

JULIE HYMAN: Yeah, but that's actually, you say, part of the thing that makes it a good play right now because it's come down so much.

DAVE MAZZA: Yeah, exactly. So the macro concerns have really weighed on the stock, right? Most people have ignored any of the positive fundamentals and focused just on the fact that it's China related, and China names have been out of favor for geopolitical reasons, macroeconomic concerns, what have you. But bottom line, it's now trading at some of its lowest levels ever since it listed, and that translates to a 10x forward times priced earnings. Where can you find a tech stock as diversified as Baidu is at 10 times forward earnings? Pretty hard to find, especially in the US.

JULIE HYMAN: Yeah, it's true, but let's talk about the gen-AI part of it specifically. So what is Baidu doing on that front, and how is it going to help boost profitability for the company?

DAVE MAZZA: Yeah, of course. So a lot of companies are talking about generative AI, but less are actually doing it. Baidu is an example where they are plowing money into generative AI. That's loss making right now, but what they have is called Ernie bot. So we're focused on ChatGPT. That's basically trained on an English language large language model. Ernie bot is Chinese using the Chinese language, and so what that means is that the results are actually more accurate there.

So that's just one example of what the company is involved in. But generative AI is a big part of its push forward, and you can imagine them integrating that into search and into other applications like a Microsoft is today.

JULIE HYMAN: We have to talk about the risk whenever we talk about a buy stock, and here the risk is pretty obvious because we've already seen it, as you said, affect the stock. And that is its focus on China and the macro headwinds and unpredictability of that.

DAVE MAZZA: Yeah, I think that's a big part of it and the reason why investors have rerated these stocks down is because of it's really hard to quantify what's going to happen in China, and there's been so much concern. But again, if you look at the valuations at 10 times forward, the revenue growth remains there. To me, this is really thinking about, unless you believe that something catastrophic is going to happen in China, if you're looking for attractive tech valuations, a name like this might fit the bill.

JULIE HYMAN: So in other words, effectively it's priced in some of the China risk already and perhaps over priced in that China risk.

DAVE MAZZA: That's what we believe. We think, at this point, the share decline has been too extended. And again, for investors looking for an opportunity, a name like Baidu could be there, and you have some of that margin of safety at this point with 10 times forward earnings.

JULIE HYMAN: All right, let's get to the stock you're avoiding here, and this has been a popular one, which you say maybe is part of the problem. Arm Holdings is what we're talking about here. The stock has really skyrocketed, especially this year. But here, you know, part of the company's sort of selling point when it did go public was this gen-AI opportunity, but you think it's overstated.

DAVE MAZZA: Yeah, exactly. I think it's hard to say goodbye to a stock with a chart looking like that, but to your point, that's part of the story. Really since their IPO, their reintroduction as a public company, they've just soared. But our concern is when we think about, again, generative AI, is it going to happen for them now? We know they're involved with Nvidia. That's known in the price. What other deals are they-- are they going to sign on?

A bigger concern to us is their involvement with Apple and Apple smartphone and MacBooks, what have you, because their licensing and the royalties from the chips, they're a big part of Arm's business. And the question is, does that really start translating anytime soon? We actually think some of the Apple concerns could bleed into that and overwhelm anything positive from gen AI.

JULIE HYMAN: Interesting. OK, let's get to the second point here, competition in chip design, in some cases from the hyperscalers themselves, in some cases other chip companies.

DAVE MAZZA: Yeah, that's exactly right. So we're seeing companies begin to design their own chips, actually kind of leverage some of the learnings that maybe they've had with Arm, or just simply the fact that everyone's getting into it. There's tons of catch up happening with Nvidia. And whether it's AMD at some point, Intel will figure it out, and others is that the chip space, the cyclicality there is still something that investors cannot ignore, and Arm I think is a little bit more subjective to the competition than other players may be.

JULIE HYMAN: And then finally here, other significant risks that we're looking at to the business?

DAVE MAZZA: Yeah, I think there's just other risks with Arm that we may not be aware of, particularly on that valuation side, right? They are trading at a hundred times forward earnings. And so even if this company has an excellent business model, you have to understand what you're getting here, and a hundred times forward earnings, let alone the insane price that they're trading at on a revenue basis, I think there's just a lot of risk there stepping into the name now.

JULIE HYMAN: Yeah, I guess the phrase priced to perfection was invented for--

DAVE MAZZA: Indeed.

JULIE HYMAN: --a situation like this. So let's talk about the risk to the downside here. It's that the stock could correct, right? Maybe then it would be a better entrance.

DAVE MAZZA: Here's the interesting thing. When we think about opportunities in generative AI, there's going to be a lot of names that are going to be exciting. This name to us has those elements, just not at a hundred times forward earnings. And so interestingly enough, a risk to the case is does actually SoftBank, which remains a large owner of this, not actually sell? And then at some point investors who have been on the sidelines or the short sellers, which were actually burned in the last earnings, have to give up and say that this becomes a buy. But for the time being, we're waiting for a pullback before adding.

JULIE HYMAN: Got you. OK, and just quickly, disclosures on this. Baidu, I believe you guys hold this in some of your portfolios?

DAVE MAZZA: Yes. That's correct. Yeah, we actually-- it's one of our largest holdings in our CHAT ETF, which is the Roundhill generative AI and technology ETF. So wanted want to make sure folks are aware of that.

JULIE HYMAN: Yeah, and Arm, no position in Arm?

DAVE MAZZA: No position in Arm.

JULIE HYMAN: OK, Dave, let's summarize the case you're making to investors here. You say people should look at buying Baidu based on that diversified business model, attractive valuation efforts, and expanding generative AI with Ernie bot. On the other side, you're saying avoid Arm. It's facing rising competition, and its true involvement in generative AI, right now at least, has been overstated, along with that soaring stock price.

Thank you so much, Dave, for being here. I appreciate it.

DAVE MAZZA: Thanks for having me.

JULIE HYMAN: And thank you for watching "Good Buy or Goodbye." We'll be bringing you new episodes three times a week at 3:30 PM Eastern.