Baidu Inc (ADR): Why the BIDU Selloff Could Have Legs

The Baidu Inc (ADR) (BIDU) stock price is taking a hit on Monday, plunging as much as 8% in intraday trading on news that government regulators will be investigating the recent death of a 21-year-old Chinese college student, Wei Zexi.

 Baidu Inc (ADR): Why the BIDU Stock Selloff Could Have LegsWei had sought treatment for a rare form of cancer he was suffering from, and took to BIDU’s search engine, sometimes called the Chinese Google — a.k.a. Alphabet Inc (GOOG, GOOGL) — to search for treatments. There he would find a paid advertisement from a military hospital that flaunted high success rates for an experimental cancer treatment.

Ultimately that treatment failed and Wei passed away, but before succumbing to his disease he claimed that BIDU was responsible for promoting untrue medical information, also pointing a finger at the hospital for running false advertising touting a high success rate for the treatment that would later fail him.

BIDU Stock’s Problems Go Deeper

China’s internet regulator will look into Wei’s claims, and obviously that’s no good for BIDU stock. The risk here is unknowable, since the investigation could turn up a massive conspiracy or nothing at all.

And, while this may sound like a somewhat cynical view, the investigation could also be nothing more than a political tool China’s government itself is using to push Baidu around.

China has recently been toying with the idea of taking 1% stakes — and a board seat — in major Chinese internet companies like BIDU, Tencent Holdings (TCEHY) and NetEase (NTES). It’s hard to tell if the government is pressuring BIDU to submit to it and accept that fate.

BIDU stock doesn’t look so great from a technical analysis vantage point, either:

BAIDU-stock-chart

It’s a little muddled over on the far right, but if you look at the blue line — the moving average over the last 50 days — you’ll see it’s at $183.50. BIDU stock had been trading soundly above that level since late February.

Today, the BIDU stock price broke below that point, indicating the beginning of a more bearish move. You can also see a little “head and shoulders” action going on — another bearish indicator.

In any case, the fresh investigation into its advertising practices isn’t something shareholders want to hear.

With the Chinese government wielding enormous power to levy the sorts of consequences they see fit, it’s times like these that remind us of the dangers of investing in Chinese stocks, even large-cap, typically solid ones like BIDU.

As of this writing, John Divine had no position in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/baidu-inc-adr-bidu-stock/.

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