Will Baidu Stock Reverse Its Trend?

Baidu Coffee

With shares of Baidu (NASDAQ:BIDU) trading around $106, 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.

Companies like Baidu are poised to see a continued rise in profits, as long as the Chinese economy continues its boom. Baidu is looking to create a mobile experience similar to Google’s (NASDAQ:GOOG). The company recently purchased mobile application distributor 91 Wireless for $1.9 billion. Baidu currently operates the majority of its searches through personal computers, and is looking to make a shift into mobile in order to continue its incredible growth in the Chinese market.

T = Technicals on the Stock Chart are Mixed

Baidu stock been on a steady decline over the last couple of years. The company is attempting to reverse this trend and break higher, but it may need a little time to digest recent news. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are 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 declining 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

44.75%

96%

95%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, 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 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 very significant 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 what that means for Baidu’s stock.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also 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%

-10.10%

-6.27%

7.32%

Baidu has seen increasing earnings and revenue figures over the last four quarters. From these numbers, it seems the markets have been expecting more from Baidu’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

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

Baidu

Google

Yahoo!

Microsoft

Sector

Year-to-Date Return

5.97%

29.48%

36.23%

35.79%

21.49%

Baidu has been a poor relative performer, year-to-date.

Conclusion

Baidu is a provider of online search and advertising to a growing Chinese consumer base. Recently, the company acquired an application distributor in order to work on a mobile experience similar to Google’s, in a bid to acquire more users. Over the last four quarters, earnings and revenue figures have been rising, but investors in the company have expected more during recent earnings reports. Relative to its peers and sector, Baidu has been a poor year-to-date performer. WAIT AND SEE what Baidu says during their upcoming earnings announcement.

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