Baidu (NASDAQ: BIDU) is in the middle of a huge transition period. The stock's recent contraction and slow earnings have correlated directly with growing mobile usage and cloud investments. Baidu must morph its "desktop search" into the mobile market to keep up. Mobile has already taken over 20% of the total volume of queries and with the company's growth, it should surpass Goggle (NYSE: GOOG) by 2015.
With its core desk top business decelerating, Baidu is trying to evolve with the growing mobile evolution. Some analysts are lowering EPS for the next couple years by (3% to 8%) because they believe revenue growth will slow in this great transition period. Margins will be tighter and advertisement will continue to weaken. It is all due to this move to mobile by consumers. It is slowly making the transition though. One step it has taken is its alliance with Apple.
Apple Alliance
Baidu has formed an alliance with Apple (NASDAQ: AAPL) which will allow Apple to make money through revenue sharing. It will take a piece of advertising dollars from search engine usage via its iPhone. It is a smart move by Apple to make Baidu its search engine and it will boost Baidu's wireless advertising business. Joshua Maa, chief executive officer at Madhouse inc., an advertising company in Shanghai that specializes in marketing on mobile devices recognized the alliance as a benefit to the company's transition.
"This is definitely going to help Baidu."
Bearish Influence
BIDU has dropped 19% during the past 52 weeks; in fact it dipped lower than its breakeven point for the year ($116.5) on June 21st. If we look at the chart one thing we see is the stock cannot seem to move through the 10 day MA (in red). Since the beginning of May this line has been a nemesis of the stock moving up, attributing to the strength of its present bearish move.
(click to enlarge)
The Options Trade
Presently trading at 112.69, I expect it to remain heavily bearish. I have a bullish options trade with a September expiration that I will hold on to. Since it has some life left, I will hold it for a little longer before I just reverse positions and take a loss. This time I will buy in the money and sell right out of the money for a shorter bear put spread play.
- Buy the August 2012 put with a strike of '115.00' (priced at $9.70)
- Sell the August 2012 put with a strike of '110.00' (priced at $6.90)
- Net Debit to Start: $2.80
- Maximum Profit: $2.20
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Trade
- We are following the bearish trend of the stock.
- Buying (ITM) gives us a shorter time element for both options to be .
- China's economy is still slowing so we do not expect a quick turn around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
