It has been an interesting last two trading sessions in the market, with the S&P off over 4.5% during this time period. Both Friday’s and yesterday’s market action were concluded with late day selling seeing the average end at session lows. This obviously is not a bullish sign. Neither is crashing through the “flash crash” low of 1066. Futures have bounced up and down this morning, and market has opened positive with both Salesforce.com (CRM) and Baidu.com (BIDU) up more than one percent. It should be very interesting to see if we can sustain a rally today, and even more importantly, hold the critical technical level of 1040 throughout the week.
I was surprised and pleased by the comments my article “10 Reasons to Avoid Baidu” brought forth. Both the amount and depth of comments were quite satisfying and enlightening. Both BIDU and CRM have had a nice pullback in the last few days. I still believe they have more to fall, due in part to recent developments and some points my commenter’s brought up in response to previous article.
5 more reasons to avoid Baidu at these levels:
1. Tencent is rapidly moving into search. (See Forbes video clip here.)
2. Cramer is touting this stock on a weekly basis, which is a good contrarian indicator in my humble opinion.
3. Even if BIDU holds this level in near term, the recent run up and increases in capital gain taxes in 2011 will bring selling pressure by end of year.
4. The amount of vitriol and lack of logic the previous article generated from those that are long BIDU strengthen my conviction that this stock is currently overvalued. Comments supporting long position fell into two general themes:
a. China is a huge market, which is kind of like stating Lebron James is a great athlete in that it basically just states the obvious and provides little insight on the actual valuation of the underlying equity in question.b. BIDU’s valuation is justified as it will grow revenues 50% - 60% a year for next five years. Possibly, but the record of 25 billion market cap companies historically doing so is not good (think Yahoo (YHOO), Cisco (CSCO), eBay (EBAY), etc. The same logic was applied to these companies during the internet boom).
5. If you screen all the stocks on the NYSE and NASDAQ for those companies that have a market capitalization of over 10B, trailing P/E of over 80, price to trailing cash flow of over 60, and price to sales of over 25... get one stock, BIDU. This means that either BIDU is truly unique in selling at this valuation, or it is overvalued. You make the choice. Be careful out there.
Disclosure: Short BIDU and CRM