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Baidu to gain from increasing demand for SVOD service

China’s leading search engine provider Baidu Inc (NASDAQ: BIDU) had a tough 2016. The stock had depreciated by about 15% y-o- y to close at $164.41 on last Friday. The company faced a credibility issue when a Chinese student died after trying an experimental cancer treatment from a hospital, which was displayed at the top while performing a web search.

Following the incident, the Chinese authorities put forth new internet search rules that crippled the advertising revenue of the company. The stock was also pulled down by a series of analysts’ downgrade. In fact, anticipating a decline in the share price, on December 12th, we had issued a recommendation to invest in a low or below contract.

As anticipated, within a week, the stock fell and the contract finished in the money. We now anticipate a recovery in the stock price due to the following reasons.

CNN

A look at the most recent financial release would reveal that Baidu had invested nearly $332 million, or 12% of its revenue, on content that is made available for users of its video platform iQiyi. The platform currently has 520 million active users. While the majority of them are not paying customers, the trend has begun to change in the past few years. The number of customers who have opted for Subscription Video on Demand (SVOD) service has increased to 20 million as of June 2016. According to Statista.com, a statistics portal, the number of paid subscribers in China has increased 56% y-o-y to 26.93 million in 2016. Furthermore, the number is expected to cross 81.52 million by 2021, thereby resulting in revenues of up to $2.9 billion. Baidu, with such a large client base, is expected to gain immensely as an SVOD provider.

The stock of Baidu is currently trading at a forward PE ratio of 30. It is reasonably cheap considering the premium at which it had traded in the past. Analysts also expect the company to realize better margins in 2017. Furthermore, Baidu’s EPS is anticipated to increase 33% y-o-y. Once the company completes validating its advertisers, the revenue is expected to grow considerably.

Analysts at Jefferies Group had reiterated their ‘buy’ rating on the stock of Baidu, with a target price of $188. So, considering the growth prospects, fundamentally, the stock is forecasted to turn bullish in the short-term.

The stock is trading near the support level of 164. The MACD has started rising in the bearish zone. This shows that the stock would begin to appreciate in the near-term.

Baidu Stock Price: January 3rd 2017

Baidu Stock Price: January 3rd 2017

So, a binary trader can contemplate on investing in a high or above contract to gain from the predicted increase in the value of the stock. The entry can be made only if the stock of Baidu is trading below $165. A time period of one week should be allowed for the contract to expire.


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