Baidu Inc Stock Is on the Verge of a More Serious Breakdown

Sentiment and psychology are working against BIDU stock, but there's one last hope

By James Brumley, InvestorPlace Feature Writer
baidu stock

There’s no denying Baidu Inc (ADR) (NASDAQ:BIDU) had a heck of a 2017. At one point it was up as much as 67% for the year. And even with the recent lull, BIDU stock remains up more than 40% since the end of 2016. That’s better than the broad U.S. market’s performance.

And yet, a closer, unbiased look at the BIDU stock price chart indicates a high degree of downside risk.

That’s not a guarantee, and certainly not an indictment of Baidu’s future. Indeed, Baidu — the so-called Google of China — remains the king of the country’s search engine, claiming 80% of that market as of last month. Being at the top of your game, however, doesn’t mean you can always sidestep profit-taking on your stock.

Baidu Is Backtracking

The parallels between Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Baidu go beyond dominance of their respective search engine markets. Like Alphabet, Baidu is waist-deep in the development of autonomous cars, and like Google, mobile is a very big deal to Baidu. Both companies are also quite serious about artificial intelligence too. These are all things that excite investors enough to drive the stock higher, even if unevenly.

But there’s a downside risk to a volatile stock driven more by stories and sentiment than actual results. See, that’s a pendulum that swings both ways in perpetuity. While a bullish swing of the pendulum is a delight, the bearish return of that pendulum can be miserable.

It looks like the pendulum is starting to swing in a bearish direction for BIDU stock again.

The weekly chart of Baidu paints the picture with some broad brush strokes. This year’s gain was ultimately the result of more than a year’s worth of compression into the tip of a converging wedge. These breakouts are nice, but not necessarily long-lived. The real red flag on the week chart, however, is the pivot bar marked with a pink arrow. That week’s doji bar, framed by a tall bullish bar from the week before it and another tall but bearish bar the week after it, marks a major change of heart for traders. Perhaps worse, the bears have followed through, now into their fourth straight week of lower lows.

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Zooming into a daily chart of BIDU stock we can see the 20-day moving average line has crossed below the 50-day and 100-day moving averages, confirming this downtrend has developed some momentum.

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Hope for BIDU Stock

There is a last bastion of hope here. That’s the floor at $225.72, where the stock hit a low a couple of times since November. The stock’s not below that line in the sand yet, but as of Wednesday, it was pointed in that direction. (The latter part of the pre-holiday week proved kinder to BIDU stock, with the price hitting $2.39 Friday morning.)

Bearishness certainly doesn’t jibe with the recent rhetoric, or the stock’s value. Baidu is priced at a trailing price-earnings ratio of 30.8 and a forward-looking one of 24.8. That’s not cheap by most standards, but this is a company that more than justifies that sort of valuation with strong revenue and earnings growth.

That’s not the point, however.

In an environment that’s turning less bullish despite the United States’ impending tax reform against a backdrop of consumer technology stocks that have become oddly overbought — Facebook Inc (NASDAQ:FB) and, Inc. (NASDAQ:AMZN) in particular, though Alphabet as well — the risk of profit-taking is serious. Shares of China’s Baidu could easily be lumped in with those vulnerable names, should that start to unravel.

Bottom Line for BIDU Stock

Baidu shares haven’t moved past the tipping point yet, to be clear. The $225.72 mark is still intact as a floor. Until it breaks, the potential risk is irrelevant.

This is a dangerous situation though, with a “sell the news” sort of outcome being a distinct possibility after so many consumer-tech names enjoyed a rip-roaring 2017. Again, it’s not an indictment of the company, but it is a caution that traders can be a fickle bunch. If the Baidu story loses its luster any more than it already has, don’t be shocked if BIDU stock becomes real unpopular, real fast.

Moreover, don’t forget that the pendulum will swing back in a bullish direction soon enough, if this is indeed an omen of a pullback.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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