BIDU: More Expensive than Facebook on a Price to Sales Basis

by Dan April 6, 2011 1:31 pm • Commentary

I can’t think of a single reason why BIDU shares should ever go down again….Ok, I am just kidding, I am a sucker for stories and in particular charts that look like this…A sucker that is to want to be contrarian…..which if you actually short the stock makes your portfolio suckier.

1 yr BIDU chart by bloomberg click to enlarge

– I guess with a $48billion market cap and trailing 12 month sales of $1.1bn dollars many net investors might draw the conclusion that BIDU is expensive relative to Facebook, which now has an approximate private market cap of ~$70billion and a supposed $2bln in trailing 12 month sales…..

-I thought this was an interesting analysis from VCmatters (here) of some of the most successful technology companies and their valuations as they passed the $2bln sales mark.  This may help to put BIDU valuation and growth in some context.   (click on to enlarge)


PRICE ACTION / SENTIMENT: stock is up an astounding 42% ytd and 130% in the last year. That said, eps and sales grew 139% and 80% in 2010 and while expected to decelerate to mid 60s% in 2011 that is till fairly torrid growth.

-If we have learned anything from the dot com boom and from NFLX, it just doesn’t pay to short stocks like this, even with ridiculous valuations it is impossible to pin down the appropriate entry point.  That said if you are a stock guy then probably a decent short term trading name as long as you are disciplined using stops.

-Wall street analysts are overwhelmingly positive on the name with 24 Buys, 4 Holds and only 2 sells with an average 12 month price target of ~$138 (where it is trading now).

MY VIEW: as I said above I am drawn to stories like BIDU on the short side, for better or worse, at least it is exciting, but the only way to be contrarian for guys and gals like us in names like this is to define your risk and not be short tails. I have learned that the hard way.

-I usually approach a name like BIDU by identifying a potential catalyst, identifying a level where I want to be short and equally important a level where I would cover.

-In this case with earnings coming in late Apr or early May that should be a suitable catalyst.  On average over the last 8 qtrs the stock has moved about 6.5% vs an ~ 7.5% implied move for this coming period (this is not exact as they have not set a date yet and some of this estimation is subjective anyway).

-as for entry this is a tough one as the stock is down 2% today, after making new all time highs Monday…..I would generally want to wait for a little bounce but this reversal could easily take it back to 120.

TRADES:  Couple Quick Ways to Lean Short With Defined Risk / Reward

1st TRADE: BIDU (ref 138.20) -Buy APR 130/125 Put Spread for .50

-Buy APR 130 Put for .80 and

-Sell APR 125 Put at .30

Break-Evens on APR Expiration (next Friday):

Upside: stock btwn 130 and 129.50 can lose up to .50, stock above 130 lose all .50

Downside: stock btwn 129.50 (down ~5%) and 125 (down ~9%) can make up to 4.50 or ~3%.

TRADE RATIONALE: If you think today’s reversal off of the all time high made earlier in the week has some legs and you want to press it look to low premium tight put spreads that will increase you chance of success.  This spread has about a 10 delta, meaning that for every dollar the stock moves the spread should move about a dime, but even more simply put it is saying that the APR 130 Put that has an 18 delta, has about an 18% chance of being in the money next Friday on expiration……so buyer beware…..low probability, but if you have conviction could be decent payoff.

2nd Trade into Earnings which should fall in May expiration

TRADE:  BIDU (stock ref 138.20)  BUY MAY 130 / 120 Put Spread for ~2.60

-Buy May 130 Put for 4.60 and

-Sell May 120 put at 2.00

Break-Evens on May Expiration:

Upside: stock btwn 127.40 and 130 lose up to 2.60, stock above 130 lose all 2.60 or 2% of underlying.

Downside: stock btwn 127.40 (down ~7.5%)  and 120 (down ~12%) can make up to 7.40, stock below 120 make full 7.40.

TRADE RATIONALE: there are not any cheap options in BIDU, generally ever, so I think unless playing for a home run, you want to use spreads.  May will capture earnings and this should serve as a suitable catalyst, while earnings and guidance are likely to be good it will be the unknown that would move the stock lower.  The stock is priced for perfection, any minor miss in an important metric could lead to profit taking.  also this spread has about 17 delta, so you will need some movement lower to break even on May expiration.  So size appropriately and only risk what you are willing to lose on a speculative play into earrings…..