Name That Trade – $BIDU: 750 Million More Customers to Go

by Dan February 10, 2015 2:05 pm • Commentary

Last night on CNBC’s Fast Money the panelists were asked to give a few ideas of where to find growth now that we have seen once loved growth sectors like 3D printing, internet services and stocks like GPRO decline precipitously from their 52 week highs. Surprising to some, my response was in China, as I see Baidu (BIDU) as cheap relative to its expected growth in a country where they have little competition and the massive tailwind of internet adoption growing at 10% a year. With existing numbers at 2x that of the total US population, and another 750 million people to go, that’s a pretty big opportunity. Watch here:

BIDU is a stock that has been on our radar for some time, largely due to the lack of domestic competition, the inability for established U.S. companies to make inroads, and the vested interest the Chinese Government has in dealing with domestic companies on information dissemination. (euphemism intended)

Event: The company reports Q4 results Wednesday after the close. The options market is implying about a 6% one day move which is basically in line with the 4 qtr avg, and shy of the 8 qtr avg of about 7%.

Vol Snapshot: Options prices are a tad below where there have been prior to the last three reports suggesting slightly less investor caution or exuberance into the upcoming report:

BIDU 1yr chart of 30 day at the money IV from Bloomberg
BIDU 1yr chart of 30 day at the money IV from Bloomberg

Given the volatility environment and the way single stocks have been moving post results, the implied move looks fair to attractive.

Options Open Interest:  Total options volume is skewed towards calls (153k vs 92k puts) with eight of the large open strikes calls. The single largest strike of open interest is 12,000 of the Jan16 300 calls.  Back in early December we highlighted a trade that included this strike (from our Notable Activity post Dec 9th):

there was a large bullish trade yesterday where trader bought the Jan16 300/370 call spread 5,000 for 8.60 vs selling 80,000 shares at 226.25,

At the time I opined that the trade was tied to stock as a means of securing better pricing on what was a fairly low delta (16) call spread.

Price Action / Techncials:  The stock is down about 5% on the year, and down 14% from the all time high made back in November. Yesterday the stock bounced off of near term support, just above its 200 day moving avg (yellow line):

BIDU 1yr chart from Bloomberg
BIDU 1yr chart from Bloomberg

While the short term appears to be at an inflection after a few months of under-performance, the technical playbook of the last few years would suggest to stick with what is working as long as the chart holds the long standing uptrend:

BIDU 2yr chart from Bloomberg
BIDU 2yr chart from Bloomberg

Valuation:  After a year of stalled growth in 2013, BIDU saw massive re-acceleration last year as analysts expect the company to print 30% earnings growth and 54% sales growth in 2014.  For 2015, consensus calls for 38% eps growth and 42% sales growth.  The stock &$77 billion market cap) trades at 24x expected 2015 earnings and nearly 7x sales of $7.8 billion.  To put that in context Facebook has a $211 billion market cap, with expected eps growth of 10%, and 37% sales growth in 2015, and trades at 38x expected earnings and 12x sales.  Relative to growth, the stock appears to be cheap to some of its fast growing U.S. peers.  But I think it is safe to say there is a bit of a “China discount” being placed on the shares by U.S. investors.

My View into the Print:   The stock is cheap relative to expected growth, but there are obvious concerns about the health of the Chinese economy. Not to mention the fear of occasional government interference.  But if you are looking for a growth play, it is appears to be there and mildly under-appreciated.  The stock is at an interesting technical spot. If it holds current levels, I could see a quick move back to $240 on the slightest bit of good news.  On an inline report and guidance I suppose that’s not enough to break the downtrend the stock has been in since the Nov highs.  And a miss and guide down the stock would likely quickly test the uptrend  and what looks like psychological support at $200 with no support below until $180.

We’re not that interested in playing the event itself but there are reasons to be bullish in the name in the intermediate to longer term. We’ll look more closely before the print tomorrow at some potential structures and will maybe revisit on the site if we just can’t resist getting involved.