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Baidu turns weak on soft Q4 guidance

BaiduThe shares of Baidu Inc (NASDAQ: BIDU), also referred to as China’s google, fell more than $10 to $171.56 in the past one week, even after reporting fiscal 2016 third-quarter earnings that topped the analysts’ estimates. The decline in revenues from online marketing services and y-o-y decline in third-quarter revenue, aided the fall in the share price. It can be noted that on September 27, you could have purchased a one touch put option, with a target price of $180. The stock was trading at about $190 at that time.

Some market participants believe that the worst is over for the stock and a rebound will happen soon. However, we believe that the poor fourth-quarter outlook and the regulatory challenges faced by the company would keep the stock in a bearish orbit during the current quarter.

The Beijing-based company reported a 0.7% decrease in the third-quarter revenue to RMB 18.25 billion ($2.73 billion), from RMB 18.383 billion ($2.75 billion) in the corresponding quarter of fiscal 2015. The fiscal 2016 third-quarter GAAP net income was RMB 3.102 billion ($464 million), or RMB8.51 per ADS ($1.28), compared to RMB 2.84 billion ($425 million), or RMB7.92 per ADS ($1.18) in the corresponding period of last year. The Zacks earnings estimate was $0.87 per ADS (American Depositary Shares).

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The Q3 2016 non-GAAP net income increased to RMB 3.446 billion ($515 million), or RMB 9.92 per ADS ($1.48), from RMB 3.24 billion ($484 million), or RMB 9.28 per ADS ($1.39), in Q3 2015.

Positive developments in the quarter include a 3% y-o-y increase to 660 million monthly active users (MAUs) of mobile search facility, 7% y-o-y growth to 348 million MAUs of mobile maps, 49% y-o-y jump in gross merchandise value (GMV) to RMB 19.4 billion ($2.9 billion), and 99% increase to 90 million wallet activated accounts at the end of September 2016.

However, there were several worrisome developments as well. The online marketing revenues for the Q3 2016 declined 6.7% y-o-y to RMB 16.490 billion ($2.473 billion).

Online marketing customers declined 15.9% to 524,000 at the end of September 2016. Traffic acquisition costs increased to RMB2.594 billion ($389.1 million) or 14.2% of total revenues, from 13.1% last year. Likewise, bandwidth costs were RMB1.241 billion ($186.1 million), or 6.8% of total revenues, against 5.3% in the similar quarter of 2015. Finally, content costs increased to RMB2.211 billion ($331.6 million) or 12.1% of total revenues, compared to 5% in the Q3 2015.

Baidu anticipates fiscal 2016 fourth-quarter revenues in the range of RMB17.840 billion ($2.675 billion) to RMB18.380 billion ($2.756 billion). The guidance represents a 4.6% to 1.7% y-o-y decrease in the revenue. The analysts surveyed by Thomson Reuters anticipate Q4 revenue of RMB 19.49 billion. Based on the details provided above, we forecast further erosion in the value of Baidu.

The stock has broken the major support level of 175, following the unimpressive results reported last week. The next major support exists at 157. The MACD has now crossed below the zero level, while the Chaikin indicator reflects the flow of money out of the stock. Thus, we anticipate the stock to test the major support and probably close the technical gap that was created early this year.

Baidu Stock Price: November 8th 2016

Baidu Stock Price: November 8th 2016

So, equipping with a one touch put option would enable a binary trader to capitalize on the stock’s downtrend. The suggested target level for the put option is $163. To improve the chance of ending the contract in the money, the binary trader should also pick up an expiry date in the first-week of December.


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