Nasdaq 100 component Baidu, Inc. (BIDU) reports earnings after Monday's closing bell, with Wall Street analysts expecting the company to report earnings per share (EPS) of $3.98 on first quarter 2020 revenue of $21.94 billion. The stock fell to a two-month low despite beating top- and bottom-line fourth quarter estimates in February, with market players unloading shares due to fears about the growing coronavirus pandemic and its impact on the Chinese business outlook.
China's mainland has sprung back to life after the pandemic shutdown, giving a much needed lift to China stocks trading on U.S. exchanges, but continued trade tension between the world's biggest superpowers should keep a lid on gains in the coming months, Even so, local goods and services that don't rely on international trade flow could gain substantial ground, offering opportune profits for American investors and traders.
Baidu fits neatly into this category, with Alphabet Inc.'s (GOOGL) Google search engine, e-mail, and other services now blocked by the Chinese government. However, Baidu isn't a monopoly because other local search engines compete for eyeballs with the big tech giant, but they can't match the company's enormous footprint. Even so, these companies all have to compete for limited advertising revenue during a crisis that could spring back to life at any time.
BIDU Long-Term Chart (2005 – 2020)
The company came public on the U.S. exchanges in August 2005, opening at $6.60 and topping out at $15.40 one day later. The subsequent downtrend posted an all-time low at $4.44 in February 2006, giving way to a steady recovery that completed a round trip into the prior high in June 2007. An immediate breakout posted healthy gains into the November 2007 high at $42.42 and turned tail, carving a sell-off that accelerated during the 2008 economic collapse.
The December 2008 low at $10.05 marked a historic buying opportunity, ahead of a bounce that reached the 2007 peak at the end of 2009. A breakout into the new decade attracted strong buying interest, lifting above $155 in July 2001, ahead of even higher highs in November 2014 and May 2018. The uptrend ended at an all-time high near $285 at that time, giving way to a double top breakdown and downtrend that posted lower lows into March 2020, when the stock may have bottomed out less than a point below the 2013 low.
The monthly stochastic oscillator crossed into a long-term sell cycle in March and is showing no signs of crossing over as we head through the second quarter. In turn, this predicts that the stock will make little upside progress in the next few months, perhaps setting the stage for a retest at the deep low. However, a holding pattern is also possible with this configuration, which makes perfect sense given the high odds for a second pandemic wave in the fall and winter.
BIDU Short-Term Chart (2017 – 2020)
The October 2017 reversal marked the first stage of a test at the 2014 high, with bears finally winning the battle in August 2018. The on-balance volume (OBV) accumulation-distribution indicator shows steady selling pressure into August 2019, followed by a retest at that level in March 2020. Both price and volume have barely budged off lows since that time, yielding dead action that reflects high levels of caution.
The stock has carved a bull flag pattern below 50-day exponential moving average (EMA) resistance since early April, with a buy-the-news reaction after earnings having the potential to trigger a breakout that reaches stronger resistance at the narrowly aligned 200-day EMA and .618 Fibonacci retracement level of the 2008 to 2018 uptrend near $115. Short-term gains above that barrier may be difficult due to downside pressure from the long-term sell cycle.
The Bottom Line
Baidu reports earnings after Monday's close, with bulls holding an advantage due to optimism about the end of lockdowns, but adverse long-term cycles may limit gains through the third quarter of 2020.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.