Can Baidu Shares Catch a Bid?

While the Chinese market as a whole has been on fire in 2015 – the Shanghai Composite Index is up 32% thus far – Chinese search engine giant Baidu (NASDAQ: BIDU) is down 16% year-to-date. However, Baidu’s course may be changing in the coming months.
The selling pressure that Baidu shares have been under for the last six months has put both the daily and weekly oscillators in oversold territory. On the daily chart we see that the slow stochastic readings just made a bullish crossover and the 10-day RSI hit an oversold reading before it bounced a little in the last few days.

Looking at the weekly chart, we see that the slow stochastic readings are in oversold territory for only the third time in the last two years. Each of the two previous times the indicators reached oversold territory, the stock has bounced, but with varying degrees of success.
The bounce from February to April was only 10%, but the stock jumped over 50% from the oversold condition last April through the middle of July, when it became overbought.

Another item of note on the weekly chart is how the stock has seemingly found support at the $190 area. This same area acted as resistance in March 2014, before the stock busted right through the resistance during the previously mentioned rally last year.
One thing that has caused Baidu shares to decline in recent months is the lowering of estimates by analysts. The consensus estimate for the coming quarter is for the company to earn $10.67 per share. While that seems respectable, 30 days ago the consensus was for the company to earn $11.43 per share. The reason for the lower estimates stems from the fact that the company posted its slowest rate of revenue growth since 2008 when it reported earnings at the end of April.
With Baidu serving as the main search engine in China, the company’s revenue had to be impacted by the slowing economy in China. Now that China’s central bank has cut rates to boost economic activity, I see Baidu’s growth rate creeping back up.
Another thing I like about Baidu is that the company is trying to diversify its revenue stream, and it’s putting its cash to work to get that diversification. The company just invested in Taboola, a content recommendation platform, and it teamed up with ride-sharing startup Uber to make a bid for Nokia’s (NYSE: NOK) mapping unit Here.
Baidu was sitting on over $2 billion in cash, and rather than standing pat with its search engine business, it’s adding different companies with different technological revenue streams to the fold.
I look for Baidu shares to bounce sharply over the course of the next six months or so, and can see the stock making a run back up to the $250 range by the end of the year – especially with the Chinese monetary policy being loose right now. As long as the Chinese policy makers are accomodative, Baidu should be in good shape.

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