Shares of Chinese search giant Baidu (NASDAQ:BIDU) look to have finally found a floor after a sharp selloff. BIDU stock has fallen $140 points, or 40%, since making new all-time highs at $340 in late February. Certainly some of the drop was warranted given the near parabolic run up in the stock.
The most recent leg lower, however, has come too far, too fast. Time to be a buyer of BIDU stock on any further weakness.
BIDU stock has gotten cheap from a fundamental perspective. Shares are now trading at a price-to-earnings ratio of just 22x, well below the 10 year median of 32.38. The price-to-sales ratio has fallen in a similar fashion to only 4.66x — well below the average of 7.13x over the past decade. The company expects revenues to grow between 26% and 39% for 2021, making forward multiples even more attractive.
This multiple compression has taken place even as the Nasdaq 100’s P/E has expanded. (It’s now approaching multi-year highs at the 40 level.) Baidu is looking cheap on both an actual and comparative basis.
The majority of the recent selling was due to a massive margin call in positions taken by the over-levered Archegos Capital. BIDU stock, along with several others like Tencent (NASDAQ:TME) and Vipshop (NYSE:VIPS), felt the biggest impact of the forced liquidation. Now that the margin selling has mostly subsided, look for value investors to begin to gravitate towards Baidu. Volatility begets opportunity.
The news over the weekend that the Baidu looks to supply 1 million self driving systems in the next 3 to 5 years through it’s Apollo autonomous driving unit should add to the bullish thesis. BIDU is already at the forefront of the burgeoning Chinese EV market with its partnership with Geely.
The Technical Tale for BIDU Stock
Baidu is looking more attractive on a technical basis. Its 9-day RSI has turned higher after reaching oversold readings. Momentum is firming and back to the neutral zone. The MACD is back in positive territory and just generated a crossover buy signal. There is major support at $200 for BIDU stock. Shares look poised to challenge the 20 day moving average at $213.56.
BIDU stock also is looking attractive on a comparative basis. Normally, Baidu is fairly well correlated to the Nasdaq 100. This makes sense since Baidu is the internet search engine behemoth in China. Lately, however, that correlation has broken down dramatically.
The Nasdaq 100 has rallied almost 10% since making a recent low on March 25. BIDU stock, however, has tread water in that same time frame. BIDI is now trading at by far the largest discount to the Nasdaq 100 since the beginning of the year. Look for that divergence to converge and for BIDU stock to be a relative out-performer over the coming months.
Getting long Baidu stock at current levels is certainly not a bad proposition. However, I prefer to be a little more cautious given the overall market environment. Selling an out-of-the money bull put spread is a lower risk way to position to be a buyer of BIDU on a further drop in the stock.
Today’s Trade Idea
Sell the BIDU May 14 $190/$185 put spread for a 75 cents net credit. The maximum gain on the trade is $75 per spread. The maximum risk is $425 per spread. Meanwhile, the return on risk is 17.65%.
The short $190 strike provides an 11% downside cushion to the $213.56 closing price of BIDU stock. It is also well below the major support area at $200.
The spread expires before earnings that are due May 19, which eliminates any earnings related risk.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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