Baidu is JPMorgan’s top pick in China’s Internet sector. During the third-quarter, its mobile search traffic surpassed PC traffic for the first time. Mobile accounted for one-third of its revenue in Q3 last year, suggesting a massive shift in how Chinese users search the Internet. Barron’s says Baidu is in the same phase where Facebook was in 2013. The world’s largest social networking company proved skeptics wrong by effectively monetizing its mobile users.
Using the risk-reversal strategy
That’s why Morgan Stanley analyst Phillip Wan believes that Baidu will see improved profits and higher margins this year. For investors, the growth in mobile ad revenue represents an opportunity to further monetize the spread of smartphones. The Chinese search engine giant is expected to release its fourth-quarter results between February 24 and March 2.
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Investors could use the risk-reversal strategy, selling a put to buy a call, to benefit from the post-earnings rally in the stock. You can sell a March $220 put and buy a March $230 call. In October last year, the company management told investors that they expected fourth-quarter revenue between $2.25 billion and $2.30 billion. It represents a 45% to 50% YoY rise in revenue.
Baidu trading below its 50-day moving average
If Baidu reports solid earnings and offers upbeat guidance, the stock will likely rise. As a result, March $230 call should increase in value. At $240, the call would be worth $10. If the stock tumbles below the put strike price, you can buy the stock or cover the put at a higher price. Barron’s says the trade is also affected by another factor not related to earnings.
The Chinese company’s stock is trading well below its 50-day moving average of $231.31. Many institutional investors use technical analysis in their stock and options trades. But Baidu is an attractive bet because it has a dominant position in the rapidly growing Chinese search market.
Baidu shares fell 0.66% to $218.15 at 10:32 AM EST on Wednesday.