November 24, 2024

NOTE: This trade idea was originated on October 21, 2024 with different strikes. We are down 50% on half of a position, or 25%. I am directing Winning Picks Premium Members to shift lower as the trade is more compelling at these levels. The NEW Trade Idea strikes are below with the original idea.  

I’m ready to get back into BIDU without overanalyzing. It’s clear what can happen when the market collectively decides to rotate into a stock, sector, or even country. In fact, the more “hated” the asset, the more momentum it can have when that sentiment shifts.

Although Chinese stocks have recently seen a rapid rise and fall in momentum, tech valuations remain attractive. Options also offer a strong way to gain long exposure.

China Stimulus

China recently introduced stimulus measures focusing on monetary easing, property market support, and financial sector stability.

The central bank reduced the reserve requirement ratio (RRR) by 0.5%, adding about $142 billion in liquidity to encourage lending and spending. Interest rates have been cut, aiming to spur consumer spending and business investment further.

In the property sector, mortgage rates on existing home loans have been reduced, and down payment requirements lowered to support real estate demand.

China also introduced programs to stabilize capital markets, allowing securities companies to access liquidity through collateral.

In addition, China has recently demonstrated a clear intention to bolster its tech stocks.

Key measures include:

• Relaxing restrictions on stock buybacks for tech companies.
• Providing tax incentives and funding support for sectors like AI and advanced semiconductor production.
• Encouraging local institutional investors to increase exposure to the tech sector, aiming to attract both domestic and international investment.

I suspect the Chinese government will continue to add stimulus to the market over time.

BIDU’s Value
BIDU is closely aligned with the Chinese government’s strategic tech goals, positioning it as a core player in areas like search, ads, video streaming, AI (Ernie), and autonomous driving (Apollo Go).

For foreign companies aiming to operate in AI or autonomous driving within China, Baidu is a natural partner, as strict compliance regulations often require collaboration with a large domestic tech firm.

For example, Apple, facing stronger competition in China, would likely need a local partner to launch AI products—a role BIDU could readily fill. In fact, according to the Wall Street Journal, Apple is exploring partnerships with Baidu for iOS 18’s generative AI features

And when you consider the value of Apollo Go as a standalone business, BIDU’s valuation screams “cheap.”

(I copy-pasted from the last idea because it still stands)

“What I found interesting was the real value put on competitors of Apollo Go (BIDU’s autonomous driving business).

Pony.ai has been operating robotaxis in Beijing and Guangzhou, China for the last two years. Over the last 8 years they raised $5.2Bn from parties such as Toyota and Saudi Public Investment Fund. Their last funding round was reported to value Pony.ai at $8.5Bn.

Not bad.

But consider that Waymo (owned by Google) in the U.S. is valued anywhere between $30Bn to a pie-in-the-sky $175Bn by a Morgan Stanley Analyst.

Now consider that BIDU only has a total market cap of $32Bn, which includes:

1. A large search/advertising business, “the Google of China;” 
2. An AI cloud business Ernie, their competitor to ChatGPT; and,
3. iQIYI, the “Netflix of China,” which is one of the largest online video sites in the world.

Plus, Apollo Go.

Here’s the incredible part…Of the $32Bn market cap, $16Bn is net-cash!!!

So, ya… BIDU is cheap.”

And the company continues to invest in the autonomous driving space...

Baidu, along with Alibaba, recently invested in Horizon Robotics, which debuted with a $6.7 billion valuation on Thursday.

Autonomous driving is gaining global traction, and Baidu is a central player with a low valuation.

The Trade

After the government stimulus announcements, BIDU gapped higher 3x on its way to the recent highs. As the momentum waned, I anticipated the need for these gaps to be filled. The third gap closed on Thursday.

BIDU earnings are due in late-November and then again in late-February.

The option spreads are mispriced by approximately $1.00 in the February – March expirations with the next earnings not likely to hit in February.

To take advantage of this, I like the following trade:

Buy 1 BIDU March 21^st $100 Calls for $6.40
Sell 1 BIDU February 21^st $110 Calls at $3.20
Net-debit = $3.20

This is a $10 calendar spread for $3.20. The max gain at the February expiration is about $8.50, or 265%. If we get past February, we can revisit then.

If it goes lower, we will adjust.

The BIDU March 21st $90 Calls for $4.30 by themselves are also good. I like the spread a little more here as it dampens the volatility until the stock finds a floor.