By Adam Clark

Chinese start-up DeepSeek shocked the world four months ago when the company claimed it had developed artificial-intelligence models rivaling Western peers at a fraction of the cost.

While questions have been raised about DeepSeek's true spending, it triggered a wave of market enthusiasm for China's AI players who have developed a flurry of competing AI models. Here's what investors need to know since then:

The Players

Alibaba -- China's e-commerce and cloud-computing champion is similar to Amazon.com in the U.S. Like Amazon, it has plowed the cash from its retail operations into becoming the largest public cloud provider in its home market.

Alibaba said recently that it would invest at least 380 billion yuan ($52.4 billion) in cloud computing and AI over the next three years, the biggest such commitment by any Chinese company.

Alibaba's AI assistant app, powered by its Qwen model, is the most popular such tool in China with 149 million monthly active users, according to product tracker Aicpb.com. Meanwhile, it is awaiting regulatory approval for a partnership with Apple to be able to offer AI services on iPhones and other devices purchased in mainland China.

Alibaba said in its most recent earnings report that AI-related product revenue had more than doubled from the previous year for seven consecutive quarters.

Baidu -- is best known for its search engine which has earned Baidu the title 'China's Google'. Much like its Western counterpart, it has pivoted toward AI development with frequent updates to its Ernie chatbot. Its AI cloud revenue grew 26% in the final quarter of 2024 from the same period the previous year.

However, it hasn't been plain sailing. Baidu reportedly lost out to Alibaba in the race to be the AI provider for Apple devices in China and doubts over its competitive positions surfaced when CEO Robin Li appeared to be absent from a meeting between President Xi Jinping and tech leaders in February.

The Ernie chatbot is free but trails rivals with only 14 million active users according to Aipcb.com. However, Baidu says that its document creation platform Wenku has 40 million paying users for its AI features.

Tencent -- Technology company Tencent spans social media, videogames and a dizzying array of other sectors. It has developed its own AI model, called Hunyuan, as well as integrating capabilities into its ubiquitous WeChat app.

Like Facebook-owner Meta Platforms, Tencent has seen benefits in integrating AI into its advertising tools, both for targeting and generation, helping marketing services revenue to rise 20% in 2024. However, perhaps the biggest use could be for videogame development -- Tencent released GameGen-O last year, an AI model for the generation of open-world videogames.

Analysts at S&P Global Ratings estimate Tencent's annual capex will exceed 80 billion yuan ($11 billion) in 2025 and 2026, up from 77 billion yuan in 2024, as it seeks to keep up with Alibaba in the AI race.

DeepSeek -- the privately owned Chinese AI company grew out of a hedge fund. It shot to prominence with the release of its R1 model. Since then, DeepSeek has continued to update its models with improvements to reasoning and coding capabilities, although none has made such a large splash as the R1 release.

Zhipu -- Founded in 2019 as a Tsinghua University laboratory spinoff, Zhipu AI is one of the country's leading startups and is backed by Tencent and Alibaba. Zhipu recently released an AI reasoning model, which it said delivers performance comparable to DeepSeek's R1 at one-thirtieth of the cost.

Zhipu is now preparing for an initial public offering. The company didn't disclose its latest valuation, but a government-backed investor in September said Zhipu was valued at 20 billion yuan ($2.75 billion). The company was added to a U.S. export blacklist in January.

Others -- Zhipu is a member of the Chinese group of startups dubbed by local media as 'AI tigers', with others frequently held to belong to the group being MiniMax, Baichuan AI, Moonshot, and 01.AI. Alibaba is reportedly an investor in each of the companies, while Tencent is also reported to have invested in several of them.

What It Means for Investors

On the face of it, Chinese AI names should be attractive to investors, trading at far below the valuations of their U.S. counterparts, with access to a vast market and protected from external competition by Beijing's regulations.

"The international funds need to have at least one or two names in China from a technology standpoint to invest in as well as European and U.S. technology names," said Ted Mortonson, a managing director and tech strategist at Baird.

Alibaba is the most popular name for Western investors. The company was a Barron's stock pick for 2025, noting the potential for its low valuation to increase. Since then it has risen 35%.

Alibaba has fans on Wall Street as well -- analysts at Benchmark Research earlier this year added it to their 'Best Ideas' list, citing it as the single best positioned company for AI adoption in China. They gave its ADRs a Buy rating and $190 target price.

However, the question hanging over Alibaba and its peers is whether their AI progress can continue in the face of stricter U.S. sanctions on chip exports. Many of the current systems have been built using Nvidia's H20 chip, a less powerful version of the chip maker's market-leading AI accelerators.

In April, Nvidia disclosed that future sales of its H20 AI accelerators to China would require a license from the U.S. Department of Commerce, which is unlikely to be granted. However, TikTok-owner ByteDance, Alibaba, and Tencent accumulated around one million H20s -- or about a full year's supply -- ahead of the restrictions according to Nikkei Asia.

Alibaba, Tencent and Baidu declined to comment on what chips they had used to train their existing AI products or how the Nvidia restrictions would affect future development.

China's domestic chips are gaining momentum, accounting for more than 30% of 2024 AI chip shipments, according to DBS Bank. Huawei has emerged as the primary alternative supplier, achieving comparable computation performance to some of Nvidia's systems, but at the cost of consuming up to four times more power.

Even if China's domestic industry can solve the chip issue, there is another threat hanging over the sector -- rising trade tensions could culminate in Chinese companies being kicked off American exchanges.

Treasury Secretary Scott Bessent refused to rule out the option when questioned about it earlier this year. U.S. investors would need to decide what to do with about $800 billion of ADR holdings in Chinese companies if Trump or the exchanges banned the listings. Investors could convert their ADRs into shares listed on the Hong Kong stock exchange but many would likely sell their holdings instead.

"The options are not that robust in China," said Baird's Mortonson. "If Trump does the delisting, and we actually accelerate our trade problems with China, by delisting Chinese stocks, U.S. investors and all the Wall Street banks will have no choice but to liquidate."

Write to Adam Clark at adam.clark@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 27, 2025 12:09 ET (16:09 GMT)

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