Bitauto (NYSE:BITA) has performed very well in the last couple of months. The stock went past my $51 price target, and the market might be pricing in my bullish case scenario where I stated that the share price might reach $60. Either way, the stock is extended at the moment and most likely fully valued, and I think it is time to take some profits off the table. I suggest that investors who still want exposure to further upside limit themselves to call options, as the reward/risk ratio at the current price is not favorable for the bulls. I am saying this because the company is slated to report earnings on August 11, which is likely to be a volatile event, as plenty of future success has been built into the current share price. The alternative is to buy Autohome (NYSE:ATHM) to get the exposure to China's online auto ad-market, but with less risk and more upside potential.
Bitauto exceeds fair valuation
In my previous article on Bitauto, I argued that the stock is worth $51 in the base case and $60 in the bull case scenario. Since the bullish assumptions are yet to materialize, and given that Bitauto's share price is now close to $60, I believe that it might be prudent to take profits and wait for a better buying opportunity. The stock is up 63% since I wrote the article, and I believe that this is a great return in just over 3 months. In late April, I wrote that the maximum downside is 15% to 20% as the share price might fall to $30, and the risks might still be there. Even if I push the downside target to $40, which might now be a great buying opportunity, the downside in that case is around 30%, while the upside should be limited to 10% to 15% from the current price, under the assumptions that the company reports Q2 earnings and revenue ahead of expectations. This is not a favorable reward/risk trading opportunity, and it might be better to wait for a pullback that provides better odds for success.
If investors want to keep their position ahead of earnings, I suggest that they use August $55 call options. At the current price of $2.60 (which was the ask price before the close on August 1), the risk is just 5% of the share price, while you get exposure to the potential upside if the company reports earnings that would push the share price higher.
The other way to participate in this industry is to buy Autohome. The stock is up 12% since I wrote the article three weeks ago, and while I have a base case price target of $42, the potential upside in the next six to twelve months is 50% or more (read more about my thoughts on Autohome here). Seeking Alpha author WestEnd511 states that Bitauto might lose Baidu as a PC-traffic partner and that Autohome might be the beneficiary. This presents additional risk to Bitauto and another positive for Autohome. Overall, at current prices, I like Autohome way more than Bitauto and my long position in Autohome proves it.
Owning Bitauto at the current price is a risky proposition. I suggest that investors at least limit their exposure through the use of August call options if they want to continue to own Bitauto ahead of earnings. The other possibility is to sell Bitauto and buy Autohome, as the reward/risk is much more favorable, and the medium-term upside may be north of 50%.
Disclosure: The author is long ATHM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.