Will Baidu Resume Its Uptrend?

With shares of Baidu (NASDAQ:BIDU) trading around $88, 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 operates as a Chinese language Internet search provider for web pages, audio files, news, images and multimedia through links provided on their website. The Company offers search and community services including an online collaboratively-built encyclopedia and a searchable keyword-based discussion forum. Baidu also provides online marketing services that includes auction-bases pay for performance and tailored solutions. As the Chinese economy expands and Chinese consumers become more connected, Baidu well-positioned to see an increasing user base that translates to increasing profits.

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T = Technicals on the Stock Chart are Weak

Since its initial public offering, Baidu stock has seen an amazing long-term uptrend. However, the stock is currently seeing lower highs and lower lows which tells us that the stock price has yet to stabilize. 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 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

45.37%

96%

93%

What does this mean? This means that investors or traders are buying a very significant 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

37.63%

63.10%

72.22%

80.85%

Revenue Growth (Y-O-Y)

43.06%

51.92%

62.53%

98.16%

Earnings Reaction

-10.1%

-6.27%

7.32%

-0.74%

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

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P = Poor Relative Performance Versus Peers and Sector

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

Baidu

Yahoo!

Google

Microsoft

Sector

Year-to-Date Return

-14.48%

19.47%

8.34%

4.02%

5.85%

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

Conclusion

Baidu is an established company with incredible amounts of growth potential. The stock has seen amazing bullish run over the last few years but has recently seen some consolidation. Earnings and revenue figures are steadily increasing but investors have expected better earnings reports. Relative to its peers and sector, the stock has not been so hot. WAIT AND SEE what Baidu does in coming quarters.

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