Cathie Wood Buys Alibaba and Baidu: Momentum or More Value Ahead?

Key Points

• Cathie Wood started multi-million dollar stakes in Chinese technology stocks, with momentum behind them and further growth to be priced in.
• China's technology expansion and artificial intelligence footprint could send these stocks into new territory.
• Wall Street analysts and other institutions share this bullish view for Alibaba and Baidu.

Chasing after others' buying can sometimes work, as long as investors have their own unique reason to buy, founded upon sound fundamentals. Recently, Cathie Wood from Ark Innovation ETF NYSEARCA: ARKK chose to expand her horizons beyond the United States technology sector, finding opportunities for undervalued blue chips in China and deploying a few million into some of the biggest names in Asia’s powerhouse.

Her choice centered around shares of Alibaba Group NYSE: BABA and Baidu Inc. NASDAQ: BIDU as they are now beginning to expand their exposure into the global artificial intelligence race, not to mention a diversified business model attached to one of the world’s fastest-growing middle classes for future consumption activity and data collection.

Some of these factors have been capturing the market’s attention, as evidenced by their recent rallies over the past month alone.

Now outperforming the S&P 500 and Nasdaq-100 indexes, investors can clearly see where momentum is headed and the preference for big investors like Cathie Wood.

The question now is whether some of this future growth and potential has already been priced into these rallies, or whether there is enough room for retail investors to drive another rally in these names.

What’s Driving Future Gains in Chinese Equities?

A few quarters ago, investors overlooked a key signal for Chinese stocks: dividend yields on the iShares MSCI China ETF NASDAQ: MCHI were higher than both the Chinese 10-year government bond and the U.S. 10-year Treasury. Normally, when an equity index yields more than government bonds, it sparks heavy buying. That’s one reason billions of dollars flowed into Chinese blue-chip stocks despite ongoing U.S.-China trade tensions.

Now, that yield advantage has faded as stock prices rallied, bringing yields back below government bond levels. Future upside will depend less on yield spreads and more on company-specific developments—particularly in the artificial intelligence space, where many of these firms are already well positioned.

Alibaba’s Quiet Expansion

Most people think of Alibaba as just an e-commerce platform that sells Chinese products in bulk; however, a real growth engine is quietly expanding behind the scenes. One of these engines is data centers, where Alibaba has been installing data centers across Asia and the Middle East.

Collecting data in these rapidly growing economies positions Alibaba favorably to monetize this information as consumer activity expands due to increased disposable income among these populations. The result can be earnings power, as seen in companies like Amazon.com Inc. NASDAQ: AMZN, which pioneered this business model.

Shifting from a commerce platform to data management is one thing. Now, Alibaba is reportedly also entering the semiconductor development business, as trade restrictions have compelled the Chinese government to urge the nation’s leading technology firms to utilize their resources and fill the import gap created by these restrictions.

That is where Alibaba plays a massive role in development and why Wall Street in China is boosting its price targets despite the stock reaching new 52-week highs. One such boost came from Joyce Ju at Bank of America, with her Buy rating and $195 per share price target.

Ju's target is not only above the consensus of $172.81 per share, but also 13.5% above today’s prices. Yet, even this bullish view stands well below the stock’s all-time high of just over $310 per share, which was reached in 2021.

Baidu’s Pivotal Role in This Race

Of course, there wouldn’t be any chance for Alibaba to expand its cloud computing and data center businesses without the proper infrastructure behind it, and that’s where Baidu acts as a direct attachment to China’s digital footprint expansion as well.

Investors can think of Baidu as China’s equivalent to Alphabet Inc. NASDAQ: GOOGL, a significant part of the U.S. technology ecosystem. Seeing this connection and growth potential ahead, it makes sense for Cathie Wood to expose her investors to this story today.

After a one-month rally of 44.4%, Baidu’s ceiling concerns investors, but such momentum often triggers buying rather than profit-taking, especially in Baidu's case. Notably, both Cathie Wood and Primecap Management increased their Baidu holdings this quarter.

With a 1.4% boost to their stakes, it doesn’t sound too exciting on percentage terms, although the net dollar amount of their position has now grown to $1 billion, representing 3.5% of the company's total value. Chances are that the results of these technology advances and increased market share in China’s technology space will draw in even more investor interest, a tailwind retail investors can ride on for the coming quarters.