Baidu remains weak on anticipation of poor Q4 performance

On November 8th , we had recommended purchasing a one touch put option in Baidu Inc (NASDAQ: BIDU) on the basis of poor fourth-quarter guidance and regulatory issues faced by the company. We had suggested target price of $163 or greater for the trade.

The stock plunged much deeper to $159.54 and ensured profit upon expiry of the contract. Since then, the stock had recovered to $170.82, mainly due to the ongoing rally in the global financial markets. Based on the details provided below, we believe that there are higher chances for the stock to depreciate in the short-term.

While reporting third-quarter 2016 results, the leading search engine provider of China stated that it anticipates Q4 revenues to be between RMB17.840 billion ($2.675 billion) and RMB18.380 billion ($2.756 billion). The outlook represents a 4.6% to 1.7% y-o-y decrease in the revenue. The Wall Street analysts expect Baidu to report revenue of RMB 19.49 billion.

CNBC

The market also expects Baidu to report earnings of $0.85 per share. The anticipated Q4 earnings is 92.27% (or $10.15 per ADR) lower than the prior year earnings of $11 per share. If this goes true, then based on the current PE ratio of 48.50, Baidu would post a net profit of only $299.69 million in the current quarter. During the third-quarter, Baidu posted a GAAP net income of $1.28 per ADS. This means that the fourth-quarter earnings are expected to be 33.59% below the prior quarter.

The UK’s institutional investor Hermes Investment Management Ltd sold 283,821 shares of the company at an average price of $164.9. As per the SEC filing, the investor held 770,661 shares of the company at the end of the third-quarter. The fact that the institution reduced its position by 26.92% reveals the bearish outlook for the stock. It should be noted that so far in 2016, Baidu has underperformed the S&P500 by 12.67%. It can be noted that several institutional investors have downgraded the stock in the past two months. This includes Credit Suisse, Deutsche bank, and Macquarie.

In the derivatives market, a trader has purchased 974 put option contracts expiring in December 2016. Such huge volumes are usually done by well-informed traders who are almost certain of what is going to happen. The open interest currently stands at 15,774.

This indicates that a lot of investors have a bearish outlook for the stock. Thus, considering the above details, we forecast the stock to remain bearish in the short-term. The historic price chart of Baidu indicates that selling may come in at 171 levels. The high positive reading of the MACD indicates the possibility of a correction in the stock.

To gain from the probable downtrend, a trader can purchase a below contract from a reputed binary broker. The trade can be taken as long as the price trades above $170. Finally, it would be beneficial if the contract remains valid for one week.

---