Will Baidu Ever make Money in the mobile Arena?
China's largest internet companies continue to explore the elusive revenue stream from mobile media. And they have yet to figure it out. Baidu (BIDU) spends 25% of its research and development budget on mobile marketing but it makes up less than 10% of the company's total sales. Mobile advertising is in its infancy stage and continues to evolve so the company will continue to roll out mobile products that should gain biggest shares of its market. Baidu, owner of China's most-used search engine, introduced a mobile browser earlier this month for devices running Google Inc.'s Android operating system. The revenue is far from reaching the hyped potential revenue but the company continues to research and move in that direction.
The Mobile Web Browser
It would invest in a new cloud-computing center in a bid to gain more control over how Internet users in China access the Web through smartphones. The launch of the browser-which offers speedy download times, Baidu services, and can run applications directly off the Internet-is the most recent step by Baidu to gain a better hold of a young but rapidly expanding mobile-Internet market. This is very smart positioning for the future.
Competition in Baidu's Future-Hello Qihoo
Qihoo is owner of the nation's most popular Web browser. Presently it has 270 million users and has entered the search market where Baidu rules with 80% of the share. Some believe the company could threaten some of Baidu's dominance and it is natural for this company to move into this arena since it already has huge numbers using its browser and security software.
With what looks like a strong solid foundation, BIDU may have found a bottom as it continues to move sideways in a very tight trading channel. It almost looks like this channel has been in place since it reached a bottom in early July. It had the bump up, but came back down. Presently I do not observe any strength in the RSI indicator that would give me a sense that the stock is gaining momentum to move up. The MACD is also weak, just like the RSI. If both indicators show any lean, it would be toward weakness and possibly more bearish moves. But presently it is moving sideways 107-117.
I like what Cris Frangold wrote about Baidu in a recent article on Seeking Alpha as he mentions the company's revenue increases. He wrote:
"The latest figures indicate that Baidu's sales growth stands at 83.2%, while its income growth stands at 88.3%. That gives Baidu a net profit margin of 46.45%, which is made even better by the fact that the company has a debt-to-equity ratio of .12%. Baidu is growing fast, and it has a very small amount of debt for a company of its size."
It is true that the economy in China may be a challenge but I believe the company will move to the upside and I would be interested in creating an income play based upon this belief.
The Options Play
- The stock is presently trading at $113.41.
- Buy the December 2012 call with a strike of '115.00' (priced at $6.50)
- Sell the December 2012 call with a strike of '120.00' (priced at $4.25)
- Net Debit to start: $2.25
- Maximum Profit: $2.25
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Revenue is on the rise. Always a good bullish catalyst.
- Bottom of a trading channel should move up.
- Chinese stimulus package may bring a bullish move to the country.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.