It has been a long time since the China and Hong Kong stock markets came alive. Shares of SenseTime, a leading artificial intelligence (AI) company in China, have jumped more than 100% in the past three days. Trading had to be halted as the share price moved too quickly. This spike in SenseTime’s shares follows the unveiling of SenseNova 5.0, its latest generative AI model.
What’s Driving SenseTime’s Stock Surge?
The excitement around SenseTime can be attributed to several factors:
- SenseTime back in the AI Race: The unveiling of SenseNova 5.0, claimed to rival OpenAI’s GPT-4 Turbo, has sparked renewed hope for SenseTime to be part of the AI race. This new model reportedly exceeds the capabilities of its predecessors in key performance metrics, suggesting a significant technological leap.
- China stock market was bullish: As part of the broader Hang Seng Tech Index, which itself rose by 12% in the whole week, SenseTime benefited from general market optimism around tech stocks.
- SenseTime shares priced too pessimistically: Despite the three-day gains, SenseTime’s shares are still down by 70% since its IPO. The sharp decline in the stock reflects negative investment sentiment toward Chinese stocks, especially those in the tech sector, due to fears of regulatory actions by the government. Also, the death of its founder in Dec 2023 also play a part in pulling the share price down further.
It’s a positive development that SenseTime appears to be regaining its footing. SenseTime’s latest AI platform, SenseNova 5.0, is best seen as a variety of Model-as-a-Service (MaaS) solutions.
These solutions span automated data annotation, customized model training and fine-tuning, model inference deployment, and development efficiency enhancements. This is a push into the AGI (Artificial General Intelligence) era, aiming to meet the exponential increase in model parameters and data volume that new AI applications demand.
The AI market remains highly competitive, with companies frequently launching new AI models touted as more ‘powerful’ than existing ones. It’s important to note that while technical capabilities are essential, the market’s perception of the technology often plays a more critical role in a company’s success. Baidu, currently perceived as a market leader in China’s AI space, exemplifies the challenge SenseTime faces in gaining significant market share.
Furthermore, it appears that the real winners in the AI race may be companies that produce the hardware necessary to run these advanced AI models, such as Nvidia, AMD, and TSMC, or those offering cloud infrastructures that support AI deployments. On this note, Alibaba Cloud also provides Model-as-a-Service (MaaS) solutions, potentially including SenseNova among the offerings of various cloud players. These companies supply essential components and services that AI technologies depend on, making them potentially better investment options than SenseTime.
Looking at the fundamentals is more discouraging. SenseTime remains unprofitable and its operations continue to consume cash rapidly. Its cash reserves have dwindled to HK$12 billion, and its free cash flow was negative HK$5 billion in FY23. Additionally, it isn’t showing signs of growth, as its revenue shrunk by 11% from the previous year. This suggests that investors—or perhaps speculators—who have recently bought into SenseTime are banking solely on its future potential with SenseNova and the current AI hype. This is not a scenario that offers me peace of mind.
Even as a stock to trade, I would wait until the price demonstrates the start of an uptrend. From a technical analysis perspective, the prices are still below the 200-Day Moving Average, indicating that we cannot yet assume the downtrend has reversed. It’s simply too early to tell, although the substantial trading volume is encouraging. Other signs that an uptrend has begun would include the 200-Day Moving Average trending upwards and the shorter-term 100-Day Moving Average crossing above the 200-Day Moving Average. I would need to see these indicators before considering trading the stock.
Hopefully, this rally will sustain, not just for SenseTime, but for Chinese stocks as a whole. They definitely need a positive boost to restore investor interest and confidence.
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