The year of the Chinese stock market could be approaching after the 2020-2023 timeframe offered nothing but headaches and frustration for shareholders. As the underlying economy shows signs of a potential recovery, investors could soon find out why stocks like Baidu Inc. (NASDAQ: BIDU) could become buy targets for mega investors already finding their way into China.

Wall Street legends like Ray Dalio have tagged along with the potential uprise in Chinese stocks, especially as the CSI 300 (China’s S&P 500) hit a near-decade low level. As news follows the stock price, the media found all sorts of justifications for why the Chinese index went that low; however, that all changes today.

Shares of Baidu are little changed this week, even after the company’s first quarter 2024 earnings results were announced. However, other peers like Alibaba Group (NYSE: BABA) are rallying by nearly 8% in a single day this week, all celebrating a common trend in the Chinese economy.

The Year of the Profit Dragon?

As dividend yields on the CSI 300 index surpassed the Chinese 10-year yield, Ray Dalio found no reason to stay outside of the iShares MSCI China ETF (NASDAQ: MCHI), and Michael Burry (yes, the guy who called the 2008 financial crisis), saw fit to make Alibaba and JD.com Inc. (NASDAQ: JD) one of his biggest portfolio positions today.

But first, investors must understand why Chinese stocks declined this much. A measure of how well an economy is doing can be found through inflation. Too calm a reading means little – if any -  business and consumer activity, which is – or was at least – the case in China.

After reporting flat to negative inflation during the third and fourth quarters of 2023, Chinese inflation has now read positive for three consecutive months to show the potential comeback in part of businesses and consumers. 

The Caixin Composite PMI index has been in expansion mode since November 2023, dragging stocks like Baidu along with it. Fundamentally, the story is that you should check out Baidu stock to see brighter days ahead. However, one more critical trend is coming that could push the stock even more.

Because Baidu is China’s version of Alphabet Inc. (NASDAQ: GOOGL), it handles vast amounts of data from consumers and businesses. Access to endless data could cross many checks off those lists looking for investment into artificial intelligence, and this technology stock starts to fit the description even more.

Stellar First Quarter

Knowing that the economy is one of the many factors pushing Baidu’s business forward, here’s a deeper look into how the company is affected today. According to Baidu’s press release, core revenue rose by 4% to reach $3.3 billion; if China’s economy is this supposedly stagnant, Baidu shouldn’t have pushed these numbers.

Because commerce is coming back into the game, as the Chinese government keeps injecting liquidity into the market in an attempt to rescue the economy, some of this money is ending up in the hands of advertising budgets.

Investors can see this at play by noticing Baidu’s online marketing revenue rise by 3% over the year, reaching $2.4 billion. In addition, Baidu’s artificial intelligence cloud business became a focus for management this quarter. 

Some reports indicate that Baidu’s ERNIE generative A.I. model is tied to Chinese military research, one of the many uses of artificial intelligence’s computing power.

Wall Street’s Take

Analysts at Citigroup Inc. see Baidu stock going as high as $176 a share. To prove these valuations right, the stock would need to rally by as much as 56.3% from where it trades today, giving investors another reason to start considering this stock for a potential watchlist.

Here is where investors can get an added bonus on top of this double-digit upside. Compared to the computer & data industry, Baidu’s 14.3x P/E ratio offers a discount of 77% to the sector’s 62.2x average valuation today. 

Even after rallying 18.8% in the past month, Baidu stock still trades at only 72% of its 52-week high. This shows investors how much gap this company could attempt to fill in delivering returns.

Not even those who are bearish in China are willing to risk more of their capital against stocks like Baidu. Over the past month, Baidu’s short interest fell by 7.4%, opening a more favorable playing field for bulls to continue the stock’s outperformance.