Here is a note from Credit Suisse published on Feb 1:
"We forecast Baidu will beat 4Q09 revenue guidance as its October and November operations were stable, according to industry sources. But, we expect Baidu’s revenue to fall 10% QoQ in 1Q10, due to: 1) December revenue, likely to fall 7% MoM and 1Q10 revenue to be extrapolated from the December ‘guesstimated’ number; 2) low seasonality; and 3) government clean-up of small websites in 4Q09/1Q10 leading to lower Baidu Union revenue (estimated to account for 30% of Baidu revenue). Due to higher market share assumptions for Baidu,we raise 2010E EPS by 14% and 2011E by 25%. Due to lower competitive pressure and recent Baidu wins on MP3 copyright lawsuits, we reduce Baidu’s WACC from 13.5% to 12.8%. We raise our DCF-based target price from US$323 to US$400. Trading at 44x 2010E diluted P/E, Baidu looks fairly valued. We upgrade Baidu to NEUTRAL from Underperform."
So, instead of using over-hyped numbers and price targets by other analysts, I think this note from CS nicely sums it up. From a technical standpoint, there is some support at $400 which I expect to hold on a sell-off. On the upside, I expect short sellers to jump back in around $470 which is previous 52-week high.
At-the-money straddle is going for $38, so they expect nearly 9% move by Feb expiration. I think the straddle is overpriced and we will see rather muted reaction after earnings. Also, the implied volatility is sharply elevated for Feb at 62 vs. 49 in March. As such, I like the following double diagonal calendar spread:
- Buy to open March $420 calls
- Buy to open March $460 puts
- Sell to open Feb $420 calls
- Sell to open Feb $460 puts
I just filled my order for $17.50 for the above spread. The break even range is $400 on the downside and $490 on the upside and I have highlighted this on the daily chart. Even though I think the straddle is overpriced, the range on this spread is wider than what the straddle suggests, so it gives us more cushion.
Good luck!
