Tuesday, October 27, 2009

Baidu (BIDU) Stains the Sheets with Guidance

There is an avalanche of interesting earnings out right now, so we'll try to address as many as possible in the coming days.

First off, we have Chinese "google" Baidu (BIDU) - I've had this position at the bottom of the portfolio with a 0.1% exposure after "taking profits" in late spring/early summer.  Never really got back in - but when this stock is in, its a pure momentum trader favorite.  Unfortunately, that leads to occasional blowups - since momentum traders only care about price action; today is one of those moments.

After gapping down 75 points, the stock is "only" down 55 right now (-13%)- the low of the day was $353 so there still appears to be a shorting opportunity here if you believe in gaps filling.  However, "$10" for BIDU is only about 3% of a move so on a percentage basis the trade is there, but not a huge returner at this point. But I expect trading today to be vicious with all the hot money - both by humans and computers - running around this high profile name.

There is very little to not like here - this is like buying an early stage Google... in what is now the largest internet market on Earth (having passed the US in the past year) and with years of growth ahead.  The only question with the stock is when to take profits, when the stock gets ahead of itself, when it becomes too crowded of a trade, et al.  In this case, the company reported good numbers but went below the consensus for guidance due to some investments necessary (new advertising system) to expand the business / help monetization in the long run.  For a stock full of a specific type of trader - that's just not acceptable. Nothing has changed in the long run however - only in the stock market does a company get punished for investing in itself.

I'd like to return to this name in a more material way at a lower price.  With today's drop the stock is "down" to 60+ forward PE ratio... hey that's cheaper than Amazon.com (AMZN)! A bargain!

Full report here.  We'll just snip some highlights.
  • Baidu, China's leading Web search service, on Monday reported profit that far exceeded analyst views, but its sales outlook was far below views and its U.S. shares plummeted 13% after hours.
  • Baidu said it earned $2.07 a share in the third quarter, based on the exchange rate of Sept. 30. That's up 41% from the year-earlier number and is 24 cents above the consensus analyst view that had risen by 5 cents since Friday.
  • But the solid results were tempered by the firm's fourth-quarter outlook. Baidu says it expects sales of $174 million and $180 million, where analysts had been expecting $203.7 million.
  • The company says it will complete a shift to a new advertising system this quarter. It said 70% of its advertisers had already made the switch.
  • The company cautioned that it expects a "temporary negative impact" on fourth-quarter revenue as it completes the transition to its new Phoenix Nest online advertising system and phases out an older system.
  • Baidu ended the quarter with 216,000 online active advertisers vs. 194,000 a year ago and 203,000 in the second quarter. 
  • The company's revenue per advertiser rose to $864 from $692 a year ago and $791 in the second quarter.
  • Baidu gets nearly all of its revenue from selling text-based ads that show up near search results. Search-based ads are cheaper than other forms of advertising, which makes them popular with small businesses in China that are just catching on to the Internet.  "The key drivers for this company are just starting to lock into gear," he said. "These are small to medium-sized businesses of anywhere between 50 and 500 employees, and they are just starting to use the Internet." 
[Jul 24, 2009: Baidu Blows the Door Off; Phoenix (Nest) Rising]
[Apr 27, 2009: Baidu.com Beats & Provides Nice Top Line Guidance]
[Dec 11, 2008: Baidu.com - Lowers Guidance, Stock is Up]
[Nov 18, 2008: Not a Good Week for Chinese Dot Coms]
[Oct 24, 2008: Baidu.com Crunched on China Economic Fears]
[Jul 23, 2008: Baidu.com, Amazon.com - Party Like It's 1999?]

Long Baidu.com in fund; no personal position

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