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China AI is Burgeoning: Stocks to Watch

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By 2030-end, AI is estimated to add $15.7 trillion to global GDP. A number of U.S. companies are riding the AI wave, including the likes of, Inc (AMZN - Free Report) and Microsoft Corporation (MSFT - Free Report) .

Amazon CEO Jeff Bezos has over and over again pointed out the use of machine learning in Amazon-like product search rankings; demand forecasting, fraud protection and warehouse fulfilment. Microsoft, in the meantime, is looking to make AI more accessible through its Azure cloud services. After all, AI in the cloud is anticipated to increase at an annualized rate of 50% through 2025.

If we shift our focus from American behemoths, China is aiming to be the premier country for AI research and services, at least by 2030. A number of companies in China are already on par with their AI rivals in the United States, if not above them.

Here’s why investors should pay attention to China’s AI boom and watch out for new AI players like Tencent Holdings Limited (TCEHY - Free Report) and Alibaba Group Holding Limited (BABA - Free Report) .

Tencent Has Huge AI Data Opportunity

One of the primary elements of AI is, undoubtedly, data. Needless to say, without data, the best of software and algorithms are of no use. While in the United States, Google dominates this space by collecting a wide array of user information through free services, in China, Tencent has a leading position in this area.

Lest we forget, Tencent’s biggest service is WeChat app, which currently boasts 1 billion active users, mostly from China. The social media app helps users pay bills, provide ride-sharing services, play video games and share social media updates, to name a few.

Tencent, by the way, has launched an AI-based platform, Miying back, which helps healthcare institutions diagnose cancer. At the same time, the platform helps hospitals and nursing homes analyse and manage health records. With more than 38,000 medical institutes, especially in China, using WeChat, Tencent is using data to transform and uplift the medical industry in the country.

Tencent’s sales climbed almost 24% to RMB 80.6 billion ($11.95 billion) in the most recent quarter, while earnings per share jumped 29% to 2.44 yuan. The company’s shares have popped 12.1% so far this year, higher than the Internet - Services industry’s gain of 10.5%.

The Zacks Rank #2 (Buy) company’s expected earnings growth rate for the current year is 11.4%, higher than the industry’s projected gain of 2.4%. The Zacks Consensus Estimate for its current fiscal-year earnings also rose 1.7% in the past 60 days.

Alibaba — A Big Player in the AI Space

Investors should keep in mind that Alibaba is a dominant tech player in the Chinese market. But the e-commerce company is increasingly becoming a major player in the AI space as well. And with Chinese government’s continuous initiative to make AI a key part of its future, expect Alibaba’s AI desires to grow along with it.

Recently, Alibaba announced that it’s developing AI chips which will be available soon. The chip will be used by autonomous vehicles. To top it, Alibaba’s AI-powered robots boost the hospitality industry. The company has also established an AI customer service agent for its logistics company, Cainiao. Thus, Alibaba has a slew of AI pursuits, which should gain traction from China’s growing AI market.

In the most recent quarter, Alibaba’s revenues rose 41% from the year-ago quarter to RMB 117.8 billion ($17.4 billion), while sales from the company’s e-commerce business went up 40% to RMB 102.84 billion ($15.25 billion). Nonetheless, these encouraging quarterly numbers, released at the end of January, have helped push the company’s stock price up 22.1% on a year-to-date basis, higher than the Internet - Commerce industry’s gain of 11.8%.

The Zacks Rank #3 (Hold) company’s  expected earnings growth rate for the current and next quarters are a solid 17.6% and 18.9%, respectively. The Zacks Consensus Estimate for its current-year earnings, by the way, increased 3.4% in the past 60 days.

A Word of Caution!

Like any kind of investment, China stocks do come with their own risks. There is a lot of trade-related issues between the United States and China, which may spook investors. And maybe that’s one of the reasons why Baidu, Inc. (BIDU - Free Report) , arguably, the biggest company driving the China AI boom, currently has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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