Baidu: A Pure Momentum Trader's Favorite (with Occasional Blowups)

There is an avalanche of interesting earnings out right now, so we'll try to address as many as possible in the coming days.

First off, we have Chinese "Google" Baidu (BIDU) - I've had this position at the bottom of the portfolio with a 0.1% exposure after "taking profits" in late spring/early summer. Never really got back in - but when this stock is in, it's a pure momentum trader's favorite. Unfortunately, that leads to occasional blowups - since momentum traders only care about price action; today is one of those moments.

After gapping down 75 points, the stock is "only" down 55 right now (-13%)- the low of the day was $353 so there still appears to be a shorting opportunity here if you believe in gaps filling. However, "$10" for BIDU is only about 3% of a move, so on a percentage basis the trade is there, but it is not a huge returner at this point. But I expect trading today to be vicious with all the hot money - both by humans and computers - running around this high profile name.

There is very little to not like here - this is like buying an early stage Google in what is now the largest internet market on Earth (having passed the U.S. in the past year) and with years of growth ahead. The only question with the stock is when to take profits, when the stock gets ahead of itself, when it becomes too crowded of a trade, et al. In this case, the company reported good numbers but went below the consensus for guidance due to some investments necessary (new advertising system) to expand the business / help monetization in the long run. For a stock full of a specific type of trader - that's just not acceptable. Nothing has changed in the long run however - only in the stock market does a company get punished for investing in itself.

I'd like to return to this name in a more material way at a lower price. With today's drop the stock is "down" to 60+ forward PE ratio... hey that's cheaper than Amazon.com (AMZN)! A bargain!

Full report here. We'll just snip some highlights.

• Baidu, China's leading Web search service, on Monday reported profit that far exceeded analyst views, but its sales outlook was far below views and its U.S. shares plummeted 13% after hours.
• Baidu said it earned $2.07 a share in the third quarter, based on the exchange rate of Sept. 30. That's up 41% from the year-earlier number and is 24 cents above the consensus analyst view that had risen by 5 cents since Friday.
• But the solid results were tempered by the firm's fourth-quarter outlook. Baidu says it expects sales of $174 million and $180 million, where analysts had been expecting $203.7 million.
• The company says it will complete a shift to a new advertising system this quarter. It said 70% of its advertisers had already made the switch.
• The company cautioned that it expects a "temporary negative impact" on fourth-quarter revenue as it completes the transition to its new Phoenix Nest online advertising system and phases out an older system.
• Baidu ended the quarter with 216,000 online active advertisers vs. 194,000 a year ago and 203,000 in the second quarter.
• The company's revenue per advertiser rose to $864 from $692 a year ago and $791 in the second quarter.
• Baidu gets nearly all of its revenue from selling text-based ads that show up near search results. Search-based ads are cheaper than other forms of advertising, which makes them popular with small businesses in China that are just catching on to the Internet. "The key drivers for this company are just starting to lock into gear," he said. "These are small to medium-sized businesses of anywhere between 50 and 500 employees, and they are just starting to use the Internet."

[Jul 24, 2009: Baidu Blows the Door Off; Phoenix (Nest) Rising]

[Apr 27, 2009: Baidu.com Beats & Provides Nice Top Line Guidance]

[Dec 11, 2008: Baidu.com - Lowers Guidance, Stock is Up]

[Nov 18, 2008: Not a Good Week for Chinese Dot Coms]

[Oct 24, 2008: Baidu.com Crunched on China Economic Fears]

[Jul 23, 2008: Baidu.com, Amazon.com - Party Like It's 1999?]

Long Baidu.com in fund; no personal position

Comments

[Mad Hedge F...:]

) If you think Google (GOOG) has a great future (click here for my recent update at www.madhedgefundtrader... ), then you’ll love Baidu (BIDU), which is Google on Viagra. With economic growth for China exploding a sizzling 8.9% in the recent quarter, it can mean only one thing for the Chinese Internet provider. The business for banner ads is booming, and with that comes expanding margins as economies of scale kick in. I have been pounding the table, trying to get readers to buy Baidu since December, when it bounced off $100 (click here for my recommendation at www.madhedgefundtrader...). Since then the stock has rocketed to $438. It is not exactly cheap here, but what multiple do you put on a hyper growing company in the world’s hottest economy? If you do play, I would suggest a limited risk vehicle in case someone soon stuffs some smelling salts up the noses of the global equity markets. Outright call options are too expensive for this bad boy, so cut your cost with a 1:1 call spread involving a long near money call against a short out of the money call. Use this 20% pullback to become a Baiduphile.

Oct 27 08:18 PM

[Peter Mycro...:]

The following are the Price to Free Cash Flow (PFCF) and Free Cash Flow Return on Invested Capital (FROIC) estimates for Baidu (BIDU) courtesy of Thomson-Reuters;

Market price used in calculations = $383.66

Year 2009

Free Cash Flow Per Share = $2.86
Total Capital Per Share = $20.54
Price to Free Cash Flow = 134 times
Free Cash Flow Return on Invested Capital = 9.88%

Year 2010

Free Cash Flow Per Share = $4.78
Total Capital Per Share = $29.54
Price to Free Cash Flow = 80 times
Free Cash Flow Return on Invested Capital = 13.07%

Year 2011

Free Cash Flow Per Share = $7.70
Total Capital Per Share = $40.10
Price to Free Cash Flow = 50 times
Free Cash Flow Return on Invested Capital = 16.76%

Disclosure = No Position in Baidu

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Oct 27 10:41 PM

[Fibozachi:]

With yesterday’s faulty price action, gaping open almost 1% from yesterday's close to 439, then rising a measly single dollar to 440 before collapsing 15 and splitting the difference to close at 433, or 55% of the daily range, Baidu (BIDU) appeared to have completed every necessary little squiggle within a long-term Elliott Wave pattern ahead of its earnings announcement. A single High Wave hourly candlestick pattern appears to have marked an historic peak for shares of BIDU at 11:00 am yesterday.

With a Tweezer Top Bear Engulfing candle shaping up on the weekly and our personal favorite candlestick pattern, a High Wave, currently established on the monthly profile, we at Fibozachi suggest shifting any previously long-focus towards one of selling corrective upward rallies. All that said, while we believe that yesterday marked an historic inflection point for shares of BIDU, anything is certainly possible and our opinion is just that.

Disclosure: shot BIDU, long puts

To view the complete original post with a fully annotated Elliott Wave labeling, visit: tinyurl.com/http-fiboz...

Oct 28 12:11 AM

[Sam Liu:]

it's a shame to compare google with baidu.

there is no comparison. google search results are blocked often and limited whereas far inferior baidu results aren't

with such support how can it not win

Oct 28 01:10 PM

[Gregman2:]

See: www.yebol.com. Really, the future of search is post-PPC.

Oct 28 03:27 PM