Since its 2005 IPO, Baidu (NASDAQ:BIDU) has had an interesting trading history. Overall, Baidu stock has returned some 1,640% over those 13 years. But the gains in BIDU stock have come in bunches.
For instance, BIDU stock was pretty flat coming out of its IPO before rallying in late 2007. After tanking during the financial crisis, Baidu stock roared back, gaining over 1,000% by late 2011. It would drop 40% over the next 18 months, then triple in a year, clearing $240 in late 2014. That rally faded over the next 18 months, but between early 2016 and 2018 Baidu stock doubled again.
Recently, Baidu stock has been fairly ugly. BIDU has pulled back 25% from those all-time highs reached in May. And it’s hard to pinpoint what the company itself could have done to cause the selloff. Its results have rebounded sharply following a number of weak earnings in the first half of 2017. Baidu’s revenue rose 32% year-over-year in the second quarter, with its earnings during the period coming in well ahead of the Street’s expectations.
The issue has been a broader selloff in Chinese stocks, with tech names getting hit particularly hard. Chinese stocks have entered bear market territory. Chinese tech names have fallen across the board. Alibaba (NYSE:BABA) has sunk 24% and recently hit a 52-week low. The news has been worse elsewhere. JD.com (NASDAQ:JD), Weibo (NASDAQ:WB), and NetEase (NASDAQ:NTES) trade 47%-48% below their 52-week highs.
At this point, there is a case for buying the dip in Baidu stock. But for two reasons, I’m not ready to pull the trigger just yet.
Is Baidu Stock a Falling Knife?
The first concern is the price action of late in Chinese stocks. Simply put, I don’t think the weakness is going to end anytime soon.
The narrative has been that trade war fears have hit the nation’s equity markets. As Josh Enomoto pointed out last month, the decline in Chinese stocks appears to indicate that U.S. President Donald Trump is winning the war. But there’s more going on.
A weakening yuan has been a minor factor in the decline of Chinese stocks. But it’s also worth pointing out that China isn’t the only emerging market whose stocks are struggling. As Pension Partners’ Charlie Bilello pointed out on Twitter, many international benchmark ETFs are down big from their all-time highs. Turkey has plummeted 70%, while Indonesia has slumped 32%, and Brazil and Russia have retreated 57% apiece.
In that context, China’s ~25% decline isn’t that onerous. But the slump isn’t necessarily over. The trade war rhetoric is only going to intensify going forward. The “risk-off” trade seems intact for the time being. And the selloff of BIDU stock after the company’s Q2 earnings shows that there’s little Baidu or Alibaba or Tencent (OTCMKTS:TCEHY) can do to offset that onslaught. I’m loath to step into Baidu stock or any Chinese play at the moment until there’s a sign of a bottom in sentiment toward the country.
Is Baidu Stock the Right Play?
For investors willing to step into Chinese stocks, the question is whether Baidu stock is the right way to do so. I’m not convinced about that, either. I’ve long been skeptical of BIDU despite its seemingly cheap valuation. That valuation now looks close to absurd at 18 times the company’s forward earnings, but there are risks here. Investors are concerned about a shift toward apps, which could hit Baidu’s search revenue. Alibaba and Tencent, among others, are trying to take advertising market share. There are reasons beyond country risk why BIDU looks so cheap relative to U.S. tech plays.
Meanwhile, I see other, potentially stronger, China plays. Alibaba and Tencent both look more attractive and are potentially less risky. I’ve long been bullish on JD, and even though that call looks awful in the context of recent events, JD stock has the highest reward (and probably the highest risk) of any Chinese tech name.
It’s possible that Baidu stock is poised to bounce soon, and it is an intriguing long-term play. No matter how the current trade battles turn out, Baidu and its peers all have a massive opportunity in China. And as the stock’s own history shows, big falls can be very quickly followed by even bigger gains.
The problem right now, however, is that I don’t see any evidence that the big drop is over or that the big gains are set to start. And so at the very least, I’m in no rush to turn bullish on Chinese equities. If I did, I’m also not sure I wouldn’t put my money behind JD, BABA, or a Chinese stock other than Baidu.
As of this writing, Vince Martin has no positions in any securities mentioned.
