The shares of the Chinese web service company Baidu (NASDAQ: BIDU) hit a high of $217.97 in November 2015, before touching a low of $139.61 in February 2016. The company’s lower guidance for the current quarter, considering the economic slowdown in China, is the crucial reason for the decline in the stock price.
For the fourth quarter of fiscal 2015, Baidu’s revenue increased 33% on a y-o-y basis to RMB 18.69 billion (or $2.88 billion). The Zacks Consensus estimate was $2.731 billion. During fiscal 2015, Baidu recorded revenue of $10.3 billion, up 35% from the prior year’s corresponding period.
The divestment of online travel business Qunar Cayman Islands Ltd. is not included in the first-quarter revenue forecast. Including the gains from the divestment deal, the fourth-quarter income attributable to Baidu is Yuan 24.71 billion or Yuan 70.92 per ADS. Excluding the gains realized in the Qunar deal, the company earned 7.61 Yuan per American Depositary Shares (ADS).
For the first quarter of fiscal 2016, Baidu expects revenue between RMB 15.41 billion ($2.37 billion) and RMB 15.97 billion ($2.46 billion). The forecast represents a growth of about 21.1% to 25.5% compared to the last year’s similar period.
During the fourth quarter, mobile contributed 56% of total revenue, up from 50% in the third quarter. The mobile search users increased by 21% as well. The highlight of the quarterly result is an increase in the mobile wallet payment service users by 183% to 53 million. Alibaba’s Alipay is the major competitor to Baidu’s Wallet.
The company is investing heavily in R&D to develop self-driving cars. Baidu also stated that it has applied for a banking license in collaboration with China’s Citic Bank and an online insurance license in partnership with Allianz and Hillhouse Capital.
The company also announced its intention to invest RMB 20 billion ($3.2 billion) in the next three years to strengthen its O2O (online to offline) services. Baidu acquired Nuomi, which is a website providing O2O service, for 160 million in 2014. The company has cash reserves of RMB 50 billion. Baidu believes that its dominance in the internet search segment in China will translate into higher revenue through O2O services. The O2O model plans to direct internet users to attractive offline services (physical shopping, health care, and food delivery) and generate business commissions.
Baidu faces little competition from Google, which is unable to make inroads in China. The current market share of Baidu is 80% in China, while that of Google is 12%. There is little change to this statistic in the past five years. Considering the restrictions from the Chinese government, Google is not expected to tilt the balance in its favor at any time soon. The forward price to earnings ratio of Baidu is only 17.7.
Thus, fundamentally, price dips should be used as an opportunity to take a long position.
Technically, as shown in the image below, the stock has major support at 165 levels. Major resistance exists at 207. The RSI is above the 50-level and pointed upwards, indicating a further rise in the price of Baidu stock.
Thus, a binary options trader should purchase a call option contract with March-end expiry. The suggested strike price for the call option contract is $190.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
