Is Baidu an Attractive Investment?

With shares of Baidu (NASDAQ:BIDU) trading around $225, 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 that 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 searches.

Baidu announced that it will increase investment in mobile offerings after mobile-revenues contributed to its strong earnings. Baidu posted financial results for the second quarter of its 2014 fiscal year on Thursday, and beat earnings estimates by $0.31. Second-quarter profits grew 34 percent from 2QFY13 at $1.7 per share. Revenues for the quarter were $1.92 billion, up 58.5 percent compared to the same period last year. Analysts had estimated $1.93 billion in revenues. Baidu is China’s largest internet search provider, and is often referred to as “China’s Google.” The company offers a variety of products and services including mobile apps. Majority of its revenues come from the online-marketing segment, where business customers utilize Baidu’s services to reach users who search for the business’ products. Baidu has been investing in mobile offerings to generate advertising-based revenue through mobile devices such as phones and tablets. Its efforts seem to be paying off. Second-quarter revenues from its mobile services – which include search and mapping – contributed 30 percent to the total revenue for the first time.

T = Technicals on the Stock Chart are Strong

Baidu stock has been surging higher over the last couple of months. The stock is currently trading near all time highs and looks poised to continue. 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 above its rising key averages which signal neutral to bullish 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

30.06%

3%

0%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

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

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

34.18%

22.83%

1.80%

3.59%

Revenue Growth (Y-O-Y)

58.53%

59.36%

54.88%

46.70%

Earnings Reaction

9.98%*

1.98%

3.48%

3.46%

Baidu has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Baidu’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

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

Baidu

Google

Yahoo!

Microsoft

Sector

Year-to-Date Return

14.83%

6.00%

-10.56%

18.67%

8.23%

Baidu has been a relative performance leader, year-to-date.

Conclusion

Baidu is a provider of online search and advertising to a growing Chinese consumer base. The stock has been surging higher over the last couple of months and is currently trading near all time highs. Over the last four quarters, earnings and revenue figures have been rising which has left investors pleased. Relative to its peers and sector, Baidu has been a year-to-date performance leader. Look for Baidu to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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