The Company with the Most AI Patents: Tencent

If you were to ask about the company with the most AI patents, the majority of people would likely mention an American company. However, the reality is different as the top two companies with the most AI patents are from China. The first one is Tencent, with 9,614 patents as of 2021, and the second is Baidu, with 9,504 patents.

Another unexpected inclusion is Ping An, primarily a financial institution rather than a technology company like the others on the list. Nevertheless, Ping An has filed a significant number of AI patents and has even integrated several AI capabilities into its insurance business.

Certainly, critics may argue that not all patents hold value and that quantity does not guarantee quality. ChatGPT has demonstrated that a substantial number of patents are not necessary. Instead, the key is to seize the right timing and achieve widespread adoption. Microsoft leverage on the popularity of ChatGPT by collaborating with OpenAI to integrate AI features into its products and establish a strong association with AI.

Even Alphabet, known as a frontrunner in AI development, experienced a momentary setback. They had to catch up and subsequently introduce Bard to remain competitive in the field.

Regarding Tencent, the usefulness of their patents remains uncertain. Tencent has indicated that they have no immediate plans to launch a ChatGPT-like system. Their most recent AI implementation involved Tencent Cloud, which introduced an AI Native vector database. Reports suggest that Tencent Cloud's VectorDB can handle billion-scale vector searches while maintaining millisecond-level latency. While this could be appealing to their cloud customers, it may not directly impact everyday users. Hence it doesn’t improve the perception of Tencent as a leader in AI.

It is also unclear if Tencent has extensively integrated AI elements into its influential WeChat platform to manage the vast volume of data and usage. Additionally, Tencent's founder, Pony Ma, tends to maintain a low profile and refrains from publicly discussing achievements, unlike his counterpart Jack Ma. Given the government's scrutiny of tech companies, Pony Ma may find value in remaining discreet.

Baidu, in contrast, did introduce an equivalent to ChatGPT called Ernie bot, which outperformed ChatGPT and GPT 4 in Chinese, as reported in a test published by a Chinese science journal. This particular test focused on standard admission and qualification exams like those required for college admissions or becoming a lawyer.

However, in terms of English performance, Ernie bot lagged behind GPT 4, although it surpassed ChatGPT. This English test was conducted and released by Microsoft.

Another evaluation concentrated on Chinese language proficiency and encompassed over 13,000 multiple-choice questions spanning more than 50 different subjects. In this assessment, Ernie 3.5 demonstrated superior performance compared to ChatGPT and GPT 4.

A third test involved questions on diverse subjects, including science and humanities, developed by a consortium of U.S. universities. In this particular evaluation, Ernie 3.5 ranked lower than both ChatGPT and GPT 4.

In essence, Ernie bot exhibits stronger performance in the Chinese language, which is expected given its origin. Furthermore, Baidu has also launched Wenxin Qianfan, an enterprise-level large language model service platform within its cloud business.

It's worth noting that Baidu's autonomous driving technology, Apollo, has been commercially deployed in China since 2021. By the end of 2022, Apollo-powered robotaxi services were operational in over 10 cities across China, including Shanghai, Shenzhen, and Guangzhou. These services have provided more than 1.4 million autonomous rides to passengers.

Therefore, Baidu is not far behind in terms of AI applications, and many of its services have already been launched. However, the market does not recognize Baidu's value as well as its Western counterpart, Alphabet, which primarily operates in the search engine industry but also has a cloud business and autonomous driving technology. Alphabet's stock market value is reflected in a higher price-to-sales (P/S) ratio of 5.4x and a higher price-to-earnings (P/E) ratio of 27x. On the other hand, Baidu has a lower P/S ratio of 2.8x and a similar P/E ratio of 26x. Essentially, Baidu's valuation is roughly half that of Alphabet if we use P/S ratio as a gauge.

There could be several explanations for this difference. Firstly, Asian stocks tend to be valued lower than those in the West. The US stock market is highly liquid and attracts significant funds. With more investment dollars focused on US stocks, they naturally have higher valuations. Other markets are often viewed as riskier, leading to fund withdrawals when signs of risks emerge.

Secondly, Alphabet has a significantly larger revenue compared to Baidu, with $283 billion versus Baidu's mere $18 billion. This disparity can largely be attributed to the global dominance of Google Search, which generates a substantial portion of Alphabet's revenue in many countries, except countries such as China, North Korea, South Korea, Russia. Baidu, on the other hand, is primarily dominant in China and among the Chinese diaspora worldwide. Its reach is much smaller than that of Google Search, resulting in advertising dollars being a fraction of Google's revenue.

Additionally, Google Search is available in developed countries where users generally have higher purchasing power. Advertisers perceive users with higher spending power as more valuable, leading them to bid higher for their attention.

Moreover, Baidu's revenue has been growing at a rate of 7% per year over the past five years, whereas Alphabet has experienced a growth rate of 21% per year during the same period. This justifies a valuation premium for Alphabet.

What about Tencent? Tencent is the largest gaming company, generating $40 billion from games in 2022. Sony, on the other hand, earned around $25 billion, while Microsoft's gaming revenue reached $16 billion.

Let's compare their P/S ratio, P/E ratio, and revenue growth (5-year CAGR):

- Sony: 1.4x, 17x, +6%
- Tencent: 5.2x, 15x, +19%
- Microsoft: 12.1x, 36x, +16%

Sony deserves to trade at a lower multiple due to its slower growth rate. However, Tencent's growth rate is comparable, if not faster, than Microsoft's. Yet, Microsoft's valuation is more than twice that of Tencent's.

Tencent also possesses a dominant social media platform in China - WeChat. Similar to Baidu, WeChat's reach is not as extensive as its Western counterpart, which in this case is Meta (formerly Facebook). WeChat generated approximately $11 billion in advertising revenue, while Meta earned 10 times more at $117 billion.

Therefore, Meta's higher valuation, with a P/S ratio of 6.4x and a P/E ratio of 35x, is justified, especially considering its faster growth rate of 24% per year over the past 5 years.

However, Tencent also achieved $24 billion in revenue from its fintech and cloud business segment in 2022. While there are major cloud competitors from the West, there is no direct equivalent to WeChat Pay. Apple Pay only generated slightly over $1 billion in revenue, while Block's Cash App appeared more promising with $10.6 billion in 2022. Mobile payment apps remain a fragmented market outside of China. Therefore, Tencent holds leading positions, particularly in gaming and fintech services.

Despite being the company with the most AI patents, Tencent's valuation does not reflect its accomplishments. We can infer that if Tencent were an American company, its share price would likely be much higher. Tencent's fundamentals remain strong, but its share price has been affected by anti-China sentiment. The share price can only improve if there is a positive shift in the perception of China.