Baidu’s Put Options Look Interesting After Wednesday’s Big Volume 

Baidu (BIDU) opened Wednesday’s trading up nearly 7% on Q4 2022 results that were better than expected. It also didn’t hurt that the Chinese search engine company had some good news to share with investors on the share repurchase front. 

As a result, volume on the day was a tad shy of 12 million, 2.5x its average 30-day volume. Unfortunately, the early momentum didn’t last. Baidu stock closed down nearly 3%. 

However, the unusual options activity for its March 3 $125 put option caught my eye on Wednesday. Yesterday's action suggests the $125 strike price might be a good bet for generating some near-term income while securing a better entry point for a long-term Baidu hold. 

There Was Much to Like About Its Q4 2022 Results

Baidu reported fourth-quarter revenues of $4.8 billion, essentially flat to a year ago. However, that was $100 million higher than analyst expectations. On the bottom line, It earned $2.21 a share on an adjusted basis, 31% higher than in Q4 2021.

For the full year in 2022, Its revenue fell 1% year over year to $17.93 billion, while its adjusted EPS was $8.54, 10% higher than in 2021. 

“In 2023, we believe we have a clear path to reaccelerate our revenue growth, and we are now well positioned to make use of the opportunities that China’s economic recovery offers us,” said Robin Li, Co-founder and CEO of Baidu.

As I said, there was much to like about its earnings report. 

For example, the company reported that the Baidu App ended December with $648 million MAUs (monthly active users), 4% higher than at the same time last year and 2.2% higher than at the end of Q3 2022.

I’m a big believer in companies that generate significant free cash flow. In 2022, Baidu’s free cash flow was $2.63 billion, 17.4% higher than a year earlier. As a result of its more robust cash flow generation, it finished December with cash, cash equivalents, restricted cash, and short-term investments of $26.87 billion and net cash of $11.96 billion. 

As balance sheets go, Baidu’s is very healthy. 

Artificial Intelligence and the Cloud

If you don’t have a conversational AI bot these days, you’re yesterday's news, which is why Baidu spent a considerable part of the quarterly conference call discussing Ernie Bot, the company’s version of ChatGPT. 

“We plan to fully integrate Ernie Bot across all of our operations. For our consumer-facing products, we plan to embed Ernie Bot into Baidu Search first. We believe this will reshape information generation and implementation and create a new entry point for the next generation internet, helping us attract more users and gain market share in a profitable manner,” Robin Li stated.

In the future, it will integrate Ernie Bot into its Xiaodu smart displays and speakers. Through the first nine months of 2022, it had the highest shipments in China in these two categories.

As for iQiyi (IQ), the Chinese video streaming platform -- Baidu owns 53% of its equity and holds more than 90% of its votes -- it will use AI-generated content to grow the platform’s user base, which stood at close to 120 million at the end of December. More importantly, it should help the platform increase its profitability. This past year, iQiyi made a non-GAAP profit of $186 million, its first since its founding in 2010.    

In 2022, Baidu’s AI cloud revenue increased by 23% to $2.56 billion, or 14.2% of its overall revenue. As the company focuses its cloud revenues on higher margin activities, the unit will continue to grow in importance to Baidu’s overall profitability. 

The $5 Billion Share Repurchase  

In a separate press release on Wednesday, Baidu announced that the board authorized a new $5 billion share repurchase program that would remain in effect through the end of 2025. 

Through Q3 2022, Baidu repurchased $3.2 billion of its stock, which suggests it won’t have any trouble completing the $5 billion buyback before the end of 2025. That’s excellent news for long-term shareholders. 

Lastly, I want to discuss the March 3 $125 put option and why it’s an intriguing play to gain a better entry point in BIDU stock.

On Wednesday, the put option volume of 2,108, nearly 21x the open interest. The bid of $1.09 meant that if you sold one March 3 $125 put contract, you’d have $109 in your pocket from a 9-day investment. On an annualized basis, that’s a theoretical return of 35.4% [365 days divided by 9 multiplied by $1.09].

Of course, there are a couple of problems with this theoretical return. First, there’s no way you’ll get $109 in premium income every time you sell a $125 put. As I write this midday on Thursday, the bid is $0.67, 39% lower than yesterday. 

This drop in premium lowers the annualized return to 24.4%. But, again, you’re unlikely to do this every week for the next 52. 

Why I like the $125 strike is because the shares have traded above this level for all but one day (Jan. 3) in 2022, which means you ought to be able to sell a few puts in the next few weeks without being forced to fork over the $12,500 for each of the put contracts you choose to sell.

From where I sit, Baidu shares look like a buy at $125.

 

More Options News from Barchart

• Unusual Options Volume Bolsters Starbucks’ (SBUX) Slow-and-Steady Approach
• Iron Condor Screener Results For February 23rd
• Unusual Call Options Activity in Antero Resources Shows Bullish Outlook
• 3 Reasons to Trust Bullish Options Volume for Cinemark (CNK)

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.