Chart of the Day – $BIDU: Earnings Preview

by Dan February 25, 2016 1:37 pm • Chart of the Day• Commentary

Event: Baidu (BIDU), the Chinese internet search giant reports Q4 results tonight after the close. The options market is implying almost a 9% one day move tomorrow. With the stock around $157.50, the weekly 157.50 straddle (the call premium + the put premium) is offered at around $14.50, or 9% of the stock price, if you bought that, and thus the implied move, you would need a move above $172, or below $143 to make money on tomorrow’s close.  The average one day move over the last 4 quarters has been about 9.5%, while the 10 year average move has been about 7.5%.  

Price Action / Techncials:  BIDU is down 17% in 2016, and down 17% on the year, and down 30% from its all time highs made mid last year.

The three year chart is a trainwreck, with and apparent head and shoulders top forming, with $140 serving as important technical support:

[caption id="attachment_61709" align="aligncenter" width="600"]BIDU 3 year chart from Bloomberg BIDU 3 year chart from Bloomberg[/caption]

The 10 year chart also shows the important of $140, which is also the long term uptrend that it only briefly broke on August 24th:

[caption id="attachment_61710" align="aligncenter" width="600"]BIDU 10yr chart from Bloomberg BIDU 10yr chart from Bloomberg[/caption]

My View: BIDU is a reasonably priced stock, trading at about 23x expected 2016 earnings, which consensus sees growing 24% on 23% sales growth. But here is the thing, eps growth has been volatile as increased spending last year caused a 10% decline in 2015 from 2014, and the bounce back in eps growth might be overly optimistic.  I would also add that 2015’s 27% sales growth was half that of 2014 at 53%, and depending on the health of China’s economy, sales growth estimates might also be a tad optimistic.

BIDU is clearly a long term winner on the Web in China, no one has been able to make a dent in their search dominance, but near term expectations might be do for a re-set.

To be 100% honest, I don’t have a strong handle of the companies fundamentals, if there were to beat and raise, the stock could clearly be up 10% in line with the implied move, but if they were to miss and guide down, I suspect we would see a move greater than the implied move given the poor technical set up.