Is Baidu A Buy?

With shares of Baidu (NASDAQ:BIDU) trading around $89, is BIDU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Baidu is a Chinese-language Internet search provider. Baidu serves three types of online participants, which include users, customers and Baidu union members. It provides Chinese-language Internet search services to enable users to find relevant information online, including web pages, news, images, documents and multimedia files, through links provided on its websites. It designs and delivers its online marketing services primarily on its Baidu.com website to its online marketing customers. China has a relatively large population and as technology growth in the country continues to explode, an increasing number of Chinese consumers are engaging in online search. Companies like Baidu are poised to see a continued rise in profits as long as the Chinese economy continues its boom.

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T = Technicals on the Stock Chart are Weak

Baidu stock has seen a bit of selling pressure over the last couple of years after seeing a period of monstrous gains. Once the consolidation is complete, the stock stands ready to continue its path towards higher prices. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Baidu is trading below its declining key averages which signal neutral to bearish price action in the near-term.

BIDU

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Baidu options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Baidu Options

31.15%

6%

5%

What does this mean? This means that investors or traders are buying an insignificant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Baidu’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Baidu look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

10.89%

37.57%

62.09%

71.24%

Revenue Growth (Y-O-Y)

42.09%

43.17%

51.85%

62.58%

Earnings Reaction

-7.92%

-10.1%

-6.27%

7.32%

Baidu has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have clearly expected more from Baidu’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Baidu stock done relative to its peers, Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Yahoo! (NASDAQ:YHOO), and sector?

Baidu

Google

Microsoft

Yahoo!

Sector

Year-to-Date Return

-10.76%

21.11%

24.64%

30.75%

13.70%

Baidu has been a relative underperformer, year-to-date.

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Conclusion

Baidu provides online search and advertising to a growing Chinese consumer base. The stock has not done well during the last couple of years and looks to be continuing its downtrend. Earnings and revenue numbers have been steadily increasing, however, investors have clearly expected better performance from the company. Relative to its peers and sector, Baidu has been an underperformer, year-to-date. WAIT AND SEE what Baidu does this coming quarter.

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