UBS sees a better risk-reward for U.S. AI vs. China AI

Published 24/03/2025, 12:12
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Investing.com -- UBS analysts believe U.S. AI stocks offer a superior risk-reward compared to their Chinese counterparts, citing greater monetization opportunities, stronger free cash flow generation, and a significantly larger addressable market.

Despite China’s AI sector showing resilience amid recent market volatility, the bank says less inspiring guidance from major Chinese internet players has led to a correction. 

“Our view is based on strong monetization opportunities and robust free cash flow generation, both of which we believe justify their premium valuation,” wrote the bank.

UBS sees the U.S. AI sector as a better long-term bet, highlighting five key metrics: capex, capex intensity, R&D spending, monetization potential, and valuations.

On capital expenditures (capex), UBS notes that AI is a highly capital-intensive industry, requiring major investments in training and inference for large language models (LLMs). 

The U.S. Big 4 (Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META)) are expected to spend $302 billion on capex in 2025, nearly six times more than China’s Big 4 ( Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU), ByteDance, Tencent (HK:0700)), which will spend $51 billion. 

UBS says this scale advantage positions U.S. companies better for the long term.

Regarding monetization, UBS argues that U.S. AI companies benefit from a more lucrative enterprise market, whereas China’s AI firms focus on integrating AI into consumer-facing sectors like e-commerce, gaming, and electric vehicles. 

“For enterprise technologies (i.e., business-to-business technology) like software, China is relatively less penetrated—as the focus is generally on low-cost or open-source models. This explains why China is only 5-10% of key global enterprise tech markets,” write the analysts.

On valuations, Chinese cloud platforms trade at 18x 2025 P/E compared to 23x for U.S. cloud firms. However, when adjusted for free cash flows, the U.S. premium shrinks to just 14%, making them a more attractive investment given their scale, pricing power, and stronger AI monetization prospects.

“With more favorable metrics for US AI over China AI, we continue to see a better risk-reward for US AI companies after the recent (unjustified) sharp underperformance. Within US AI, we continue to like AI semiconductors and leading cloud platforms,” concludes the bank.

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