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Baidu: 3 Trades To Take Advantage Of Recent Price Slip

Published 11/11/2021, 09:02 AM
Updated 09/02/2020, 02:05 AM
  • Like many Chinese technology shares, BIDU stock is down more than 24% so far in 2021.
  • Although Baidu is known for its internet services and as the leading search engine in China, management’s focus has been shifting to artificial intelligence and autonomous driving.
  • Despite potential further volatility in the stock, buy-and-hold investors could regard any short-term decline in BIDU shares as an opportune entry point.

Investors in the Chinese technology heavyweight Baidu (NASDAQ:BIDU) have seen BIDU shares lose more than 24.1% so far this year. The stock’s 52-week range has been $132.26 - $354.82.

Baidu Weekly Chart.

Baidu dominates the Chinese search engine market, with more than 76% market share. Yet globally, it has less than a 2% slice.

On the other hand, with a market share of well over 90%, Alphabet's Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is the leading search engine worldwide.

Recent years have seen the company pay attention to AI-powered technologies. Metrics show that the Beijing-based company “holds the most AI-related patents and has filed the most AI-related patent applications of any company or organization in China.”

In addition, management has been putting resources into autonomous driving technologies. As of the second-quarter:

“The Baidu Apollo autonomous driving service had provided more than 400,000 rides and driven more than 8.7 million miles.”

Baidu released robust Q2 results in August. Revenue increased by 27% year-over-year, thanks to significant growth in AI-powered cloud products. A rebound in advertising revenue also benefited the search giant.

On the results, CEO Robin Li said:

"Baidu Core delivered another strong quarter, powered by the fast growth of our new AI business. AI enables businesses and local governments to do more and serve more people…. We are excited about the opportunities to help different industries transform their business with AI and support our goal to become carbon neutral by 2030."

Prior to the release of the quarterly results on Aug. 12, BIDU shares were around $165. In the following several days, they declined to a recent low of $137.33. Since late August, however, buyers have come back and the stock is now just shy of $164. The company will announce Q3 metrics on Wednesday, Nov. 17.

What To Expect From Baidu Stock

Among 37 analysts polled via, BIDU stock has an 'outperform' rating.

The shares have a 12-month median price target of $253.30, implying an increase of about 54% from current levels. The 12-month price range currently stands between $153.65 and $357.02.

Trailing P/E, P/S and P/B ratios for BIDU stock stand at 8.14x, 3.05x and 0.32x, respectively. This means the recent decline in price has pushed BIDU into value-stock category. By comparison, these ratios for GOOGL stock stand at 28.68x, 8.27x and 8.09x

Readers who watch technical charts might be interested to know that a number of BIDU's short- and intermediate-term indicators are still cautioning investors.

As part of the short-term sentiment analysis, it would be important to look at the implied volatility levels for Baidu stock options, which typically shows traders the market's opinion of potential moves in a security. However, it does not forecast the direction of the move.

BIDUs current implied volatility is 47.1, which is higher than the 20-day moving average of 38.8. In other words, implied volatility is trending higher, which might mean that options markets are expecting larger moves in the coming days. We might possibly see increased choppiness around the earnings result on Nov. 17.

Our first expectation is for a potential pullback toward the $150 level, after which shares would likely trade sideways while they establish a new base. In case of such a decline, long-term investors will find better value.

3 Possible Trades On BIDU Stock

1. Buy Baidu Stock At Current Levels

Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in Baidu stock now.

On Nov. 10, BIDU stock closed at $161.56. Buy-and-hold investors should expect to keep this long position for several months while the stock makes an attempt toward $253.30, a level which matches analysts’ estimates. Such an up move would mean a return of close to 55% from the current level.

Readers who plan to invest soon but are concerned about large declines might also consider placing a stop-loss at about 3-5% below their entry point.

2. Buy An ETF With BIDU As A Main Holding

Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that might be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to Baidu stock but would still like to have substantial exposure to the shares could consider researching a fund that holds the company as a top holding.

Examples of such ETFs include:

  • Global X MSCI China Communication Services (NYSE:CHIC): This fund is down 21.1% YTD, and BIDU stock’s weighting is 8.92%;
  • Invesco Golden Dragon China ETF (NASDAQ:PGJ): The fund is down 29.3%YTD, and BIDU stock’s weighting is 8.77%;
  • Global X Social Media ETF (NASDAQ:SOCL): The fund is down a slight 0.06% YTD, and BIDU stock’s weighting is 4.78%;
  • Innovator Loup Frontier Tech (NYSE:LOUP): The fund is up 15.80% YTD, and BIDU stock’s weighting is 4.40%.

3. Diagonal Debit Spread On BIDU Stock

Our third trade is diagonal debit spread on Baidu using LEAPS options, where both the profit potential and risk are limited. We have provided numerous examples (for example, here and here) of this type of options strategy that is also known as a "poor person's covered call" on a given stock.

A trader first buys a longer-term call with a lower strike price. At the same time, the trader sells a shorter-term call with a higher strike price, creating a long diagonal spread.

The call options for the underlying stock have different strikes and different expiration dates. The trader goes long one option and shorts the other to make a diagonal spread.

Most traders entering such a strategy would be mildly bullish on the underlying security. Instead of buying 100 shares of Baidu, the trader would buy a deep-in-the-money LEAPS call option, where that LEAPS call acts as a surrogate for owning the stock.

As we write, BIDU stock is at $163.75. For the first leg of this strategy, the trader might buy a deep in-the-money (ITM) LEAPS call, like the BIDU 19 January 2024, 120-strike call option. This option is currently offered at $63.05. It would cost the trader $6,305 to own this call option that expires in about two years and two months instead of $16,375 to buy the 100 shares outright.

The delta of this option is close to 80. Delta shows the amount an options price is expected to move based on a $1 change in the underlying security.

If BIDU stock goes up $1 to $164.75, the current option price of $63.05 would be expected to increase by approximately 80 cents, based on a delta of 80. However, the actual change might be slightly more or less depending on several other factors that are beyond the scope of this article.

For the second leg of this strategy, the trader sells a slightly out-of-the-money (OTM) short-term call, like the BIDU 21 January 2022 165-strike call option. This options current premium is $12.35. The option seller would receive $1,235, excluding trading commissions.

There are two expiration dates in the strategy, making it quite difficult to give an exact formula for a break-even point in this trade. Different brokers might offer profit-and-loss calculators” for such a trade setup.

The maximum potential is realized if the stock price is equal to the strike price of the short call on its expiration date. So the trader wants the BIDU stock price to remain as close to the strike price of the short option (i.e., $165 here) as possible at expiration (on Jan. 21, 2022), without going above it.

Here, the maximum return, in theory, would be about $1,128 at a price of $165 at expiry, excluding trading commissions and costs. (We arrived at this value using an options profit-and-loss calculator.)

Here, by not investing $16,375 initially in 100 shares of Baidu, the traders potential return is leveraged.

Ideally, the trader hopes the short call will expire out-of-the money, or worthless. Then, the trader can sell one call after the other, until the long LEAPS call expires in over two years.

Latest comments

Thank you Tezcan. Your article is always very informative and helpful.
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