EVENT / PRICE ACTION/ SENTIMENT: company reports Q1 earnings tonight after the close.
-The options market is implying about a 8% move which is fairly rich to the 8qtr average move of ~6.75%.
-Analyst community is overwhelmingly positive on the name with 24 Buys, 4 Holds and only 1 lonely Sell rating.
-BIDU is up almost 57% YTD vs the Nasdaq which is up ~7% and GOOG its closet peer down ~10%. The tock is up almost 25% in the last month alone.
-Company is experiencing continued rapid revenue growth fueled by their near dominance in search in China. Bulls eye recent initiatives in online video and social media as the next leg of growth, while also fearing the potential for margin degradation from a very healthy high 60s% in Q4.
-Analysts expect the company to grow earnings and EPS at about 70% this year and about 45% next.
MY VIEW: Back on April 6th when the stock was ~138 I tried to make the argument (read here) that BIDU with a $48billion market cap and trailing 12 month sales of ~$1.1 billion that the stock was more expensive than Facebook with an estimated $70billion private market value and a supposed $2billion in trailing 12 month sales.
-Stock is now ~152 with an ~$53billion market cap, oh and those trailing revs didn’t change…….yeah yeah this is a very simplistic point but hopefully makes some investors consider that due to scarcity of Facebook shares there will always be a natural premium to private shares over public shares like Baidu….but to no avail, the stock keeps marching higher….
-As many of you know I can’t and don’t buy stocks with characteristics like BIDU, and yes I will always miss out on the next new new thing, but I generally take more satisfaction in betting against such stories in a defined, measured way (see NFLX trade suggestion from yesterday) than simply joining the herd.
-Any signs of revenue slow down and margin compression this stock gets hit, likelihood of this not great right now if you look at the recent results of SOHU and SINA (not direct comps, but gave a good sense for the online strength in China at the moment.
-SO, AS USUAL, DON’T SHORT THE STOCK AND FACE THE OBVIOUS RISK THAT THE STOCK KEEPS GOING HIGHER, WELL, JUST BECAUSE…..LOOK TO USE OPTIONS TO MAKE A CLEAR CALCULATED CONTRARIAN BET WITH ATTRACTIVE RISK REWARD.
TRADE I AM CONSIDERING INTO THE PRINT:
1. BIDU ( ref 152.37) Buy the May 140/130/120 Put Butter fly for ~1.20
-Buy 1 May 140 Put for ~2.90
-Sell 2 May 130 Puts at ~2.00 (1.00 each)
-Buy 1 May 120 Put for ~.30
Break-Even on May Expiration:
Upside: 140 or Higher lose 1.20
btwn 138.20 and 130 make up to 8.80
Best Case at 130 make 8.80.
Stock Lower than 130: btwn 130 and 120 payout trails off, 120 or lower lose 1.20 in premium.
TRADE RATIONALE: I am not placing a very high conviction on the likelihood of the stock selling off after the print unless there is some form of guide lower….But I like the almost 8.5 to 1 payout of the Put Butterfly if the stock is down 14% at 130 on May expiration. 130 would be an approximate 50% retracement of the move off of the February lows.