Option Trade 
Baidu Inc. (ADR) (NASDAQ:BIDU) Calls
Thursday, October 26, 2017

** OPTION TRADE: Buy the BIDU NOV 17 2017 270.000 CALL at approximately $8.00. Place a pre-determined sell at $16.00.

Also include a protective stop loss of $3.20.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Chinese tech giant Baidu Inc. (ADR) (NASDAQ:BIDU), the Google of China, reports Q3 results after the close today, Thursday, October 26. Baidu should be at full strength when it reports its financial results for the third quarter.

Analysts see EPS jumping 47% to $2.19, as revenue climbs 26.7% to $3.47 billion, which would mark the biggest increase in almost two years.

Back in July China's top search engine was targeting $3.412 billion to $3.503 billion in revenue for the quarter, 27% to 30% ahead of the prior year's showing.

Chines stock has come a long way in recent times……

  • It appears that the Chinese economy may be coming out of their slow period.
  • The Chinese government has picked its winners in every industry and sector, including the Internet and social media stocks. These "winners" have the full backing of the government, which allows them to dominate the huge Chinese market.
  • Transparency appears to be better among these huge companies versus the smaller Chinese companies that went public just a decade ago.

Baidu doesn't provide bottom-line guidance, but analysts are holding out for adjusted earnings soaring. It has beaten Wall Street profit targets by a double-digit percentage margin every single quarter over the past year.

Shares of Baidu have gained 62.0% year to date, outperforming the industry’s 27.5% rally.

Baidu’s 50-day moving average is $246.94 and its 200 day moving average is $207.89. Baidu has a 12-month low of $159.54 and a 12-month high of $274.97. The stock has a market capitalization of $91.55 billion, a PE ratio of 48.12 and a beta of 1.99.

Influencing Factors

The third quarter should be Baidu's heartiest period of growth since late 2015. The shares have soared 32% since Baidu came through with well-received second-quarter results three months ago, and that was with a mere 14% year-over-year uptick in revenue. Baidu stock has skyrocketed 62% this year, hitting fresh all-time highs just last week.

Baidu's dominance in the mobile search market and its consistent product development efforts remain positives. In the last quarter, the company witnessed significant improvement in its flagship Mobile Baidu app with version 9.0. The company saw strong user adoption for Mobile Baidu, with robust DAU growth. Also, feed user adoption and feed daily active users remained strong. The company expects the momentum to continue in the upcoming quarter.

Moreover, the company's focus on using AI techniques - machine learning, deep learning and natural language processing - has helped it in providing more useful and personalized search results. The company has been using AI techniques to expand its presence in the self-driving vehicle space and cloud, among others. These initiatives have helped the company to witness strong momentum in customer additions and revenues, which will continue in the upcoming third quarter.

On the monetization front, Baidu added nearly 20,000 online active customers sequentially across a range of industries, including education, auto, logistics and the local services. The company's customer base is expected to grow in the upcoming quarter, driven by improved product quality, usage growth in feed and increased diversification.

Baidu has gotten serious about autonomous vehicles. CEO (chief executive officer) Robin Li told the Wall Street Journal that the company plans to release self-driving buses with the help of a Chinese bus maker in China (MCHI) next year.

Baidu unveiled Apollo, an autonomous vehicle with open-source software, earlier this year and is also teaming up with Chinese automaker BAIC to produce autonomous vehicles with the help of Apollo.

Analysts and Hedge Funds Opinions

Analyst moves just ahead of Thursday afternoon's report have been encouraging. TH Data Capital upgraded the shares from Hold to Buy on Monday.

Also, Baidu, Inc. was upgraded by equities researchers at UBS AG from a “hold” rating to a “buy” rating in a research report issued to clients and investors on Monday.

And, last week it was Gregory Zhao at Barclays sticking to his neutral Equal Weight rating but boosting his price target from $210 to $250. Zhao feels the stock is fairly valued here, but he still boosted his price goal on expectations of a solid third quarter report.

As well, Baidu, Inc. had its target price increased by equities research analysts at Jefferies Group LLC from $232.00 to $305.00 in a report released on Friday. The firm currently has a “buy” rating on the information services provider’s stock. Jefferies Group LLC’s price objective points to a potential upside of 15.14% from the company’s current price.

Several other analysts have also recently commented on the company…..

  • Zacks Investment Research raised shares of Baidu from a hold rating to a buy rating and set a $265.00 target price for the company in a research note on Wednesday, September 27th.
  • HSBC Holdings plc reaffirmed a buy rating and issued a $282.00 target price (up from $245.00) on shares of Baidu in a research note on Wednesday, September 27th.
  • Wells Fargo & Company assumed coverage on shares of Baidu in a research note on Tuesday, September 26th. They issued an outperform rating and a $290.00 target price for the company.
  • Vetr raised shares of Baidu from a buy rating to a strong-buy rating and set a $265.83 target price for the company in a research note on Tuesday, September 26th.
  • Finally, Bank of America Corporation reaffirmed a buy rating and issued a $263.00 target price on shares of Baidu in a research note on Monday, September 18th.

One equities research analyst has rated the stock with a sell rating, nine have assigned a hold rating, fifteen have issued a buy rating and three have given a strong buy rating to the company. The stock presently has a consensus rating of “Buy” and an average price target of $250.45.

Institutional investors that have recently made a change to their positions in the stock….

  • Janus Henderson Group PLC lessened its position in shares of Baidu, Inc. by 52.6% during the 2nd quarter. The firm owned 40,911 shares of the information services provider’s stock after selling 45,359 shares during the quarter. Janus Henderson Group PLC’s holdings in Baidu were worth $7,316,000 at the end of the most recent reporting period.
  • BlackRock Inc. raised its holdings in Baidu by 4,625.7% in the 1st quarter. BlackRock Inc. now owns 11,974,528 shares of the information services provider’s stock valued at $2,065,846,000 after acquiring an additional 11,721,135 shares during the period.
  • Capital World Investors raised its holdings in Baidu by 54.2% in the 2nd quarter. Capital World Investors now owns 9,726,375 shares of the information services provider’s stock valued at $1,739,659,000 after acquiring an additional 3,419,291 shares during the period.
  • Harris Associates L P raised its holdings in Baidu by 29.7% in the 2nd quarter. Harris Associates L P now owns 9,015,196 shares of the information services provider’s stock valued at $1,612,458,000 after acquiring an additional 2,066,614 shares during the period.
  • Cambiar Investors LLC bought a new position in Baidu in the 2nd quarter valued at about $274,670,000.

Harvey’s Options Volatility Indicator

Summary

This should be the second quarter of dramatic net margin expansion, as Baidu sheds unprofitable businesses to focus on its stronghold of search while also investing in artificial intelligence that it sees boosting its core products. Chinese growth stocks have been surging back into investor fancy in recent months.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the BIDU NOV 17 2017 270.000 CALL at approximately $8.00. Place a pre-determined sell at $16.00.

Also include a protective stop loss of $3.20.

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