Chinese stocks like Baidu (NASDAQ:BIDU) and Alibaba (NYSE:BABA) have been under pressure for almost a year now. The Trump trade war has cast most of these stocks out of favor, while at the same time putting a crimp on the Chinese economy. That’s a double-blow for these share prices, as BABA and BIDU stock and peers have badly lagged the market.
The S&P 500 index is now just a hair under its all-time high, while BIDU stock is well off its 52-week high of $284. In fact, it’s more than $100 per share below this mark, and that’s after a notable rally from its lows.
However, these names have been coming back in favor as U.S.-China trade talks have taken a more positive tone. That doesn’t necessarily make them outright buys, although they are starting to look much better right now. Earlier this week we outlined the buy signal in BABA stock and now it’s Baidu’s turn.
Let’s see why this one could have 40% upside to $250.
Valuing Baidu Stock
Shares of BIDU stock trade at roughly 20 times this year’s earnings. Not horribly expensive, but certainly not a big discount to the market. On a trailing basis, Baidu stock trades at a lower valuation — roughly 18 times earnings — but I prefer valuations based on current metrics, not trailing metrics.
The trailing multiple is lower than the current multiple because earnings expectations call for a decline in 2019. Analysts expect a 12% decline in earnings this year before a 36% rebound in 2020. Based on the latter’s numbers, Baidu stock trades at just 15x the $11.83 in earnings per share that analysts are currently forecasting. With 10 straight quarters of earnings beats, that should instill some confidence in BIDU.
On the revenue front, consensus expectations call for 16.6% growth this year and 16.5% growth next year. That’s pretty consistent, and I would hypothesize that if a trade deal gets done between Washington and Beijing, there’s more potential upside for BIDU, BABA and others.
The average price target on Baidu stock sits near $217. From its current price of $180, that implies more than 21% upside. That’s a great upside target, and we’ll discuss a few more targets in a minute when we look at the charts, but I believe BIDU can run to $250 under the right circumstances.
That would imply about 40% upside from current levels. While admittedly ambitious, keep in mind Baidu stock was almost $35 above this level less than a year ago. Baidu — essentially the Google of China — runs a great business and despite some short-term bumps, has a very solid long-term runway.
Trading BIDU Stock
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Looking at the chart above, it’s clear that Baidu stock has suffered a few major blows. It needs some help — a U.S.-China trade deal, a few strong earnings beats, etc. — but if the company can deliver, BIDU has big upside potential.
So what are some upside levels to focus on? The first mark is the 200-day moving average at $198. If Baidu stock can push through this mark, there’s the 38.2% retracement for the 52-week range at ~$203.
Above that, we have the 50% retracement near $220 and the 61.8% around $235. If BIDU stock is fortunate to get this far at some point in the next 12 months, a gap-fill (dashed line) is on the table and an extension through this mark gets us to $250. Keep in mind, a potential rally of this size won’t happen overnight, but it’s possible over a longer-term time frame.
What about the downside? We’ve got a fairly marked-up chart above, but there are a lot of levels in play. No matter which downtrend we observe (blue lines), Baidu stock has pushed through all of them. That’s a great first step. Now we need to see uptrend support (purple line) hold as support.
Notice how the 50-day was resistance on each rally over the last six to eight months. Now above this mark and with this moving average turning higher, we need to see it act as support. If it does, it becomes a valid buy-the-dip spot. Below $160 and BIDU stock may need to reset.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long BABA and GOOGL.
