Brean Capital: Baidu A Top Pick For 2015, Alibaba Has Strong 3-Year Potential

In a note out Thursday, analysts at Brean Capital came out bullish on the Chinese Internet sector, pointing to rising smartphone use, infrastructure upgrades and increased competition. Specifically, Brean sees Baidu Inc (ADR) BIDU as a top pick for the next 12 months and Alibaba Group Holding Ltd BABA as a strong three-year pick.

The company will capitalize on improvements in optimized search results and growth trends in mobile. Analysts also say that costs will taper off, while losses on prior investments will decrease. A key to the future: the travel space. However, the analysts note that Baidu will have to compete with a growing Alibaba for share in that space.

Alibaba will also be competing in foreign markets, Brean said, presenting opportunities for 2015 and beyond. This will lead to strong three-year returns as the company gains share in mobile payments and China globalizes.

Risks for Alibaba include pressure to sustain growth rates, the lock-up expiration in March and challenges to improving merchant ROI.

Baidu has gained nearly 35 percent in the prior year, but is down 9 percent from its 52-week high of $251.99.

Alibaba is up 10 percent from its IPO.