Baidu remains weak on loss of rev. from healthcare advt.

After rallying nearly 24% to $197.80 in less than two months, the share price of Chinese search engine company Baidu, Inc. (NASDAQ: BIDU) is showing signs of weakness.

The stock closed Monday’s trading session at $188.86. The rally was mainly due to the fiscal 2016 second-quarter results that beat analysts’ estimates. The 6% y-o-y increase to 667 million Monthly Active Users (MAU) of mobile search also contributed to the increase in the share price. However, the web service provider is currently facing a host of problem as discussed below. Considering that, we have a bearish outlook on the stock.

The Chinese company reported an increase in the second-quarter revenue to RMB 18.26 billion ($2.748 billion), from RMB 16.58 billion ($2.46 billion) in the corresponding quarter of fiscal 2015. The second-quarter non-GAAP net income declined 30.1% to RMB 2.808 billion ($422.5 million) or RMB 8.08 per share ($1.22), from RMB 4.02 billion ($604.9 million) or RMB 11.39 per share ($1.72) in the prior year’s similar quarter. The Wall Street analysts expected Baidu to report earnings of $0.94 per share on revenue of $2.59 billion.

No doubt, the earnings and revenue topped the analysts’ estimates. However, it was way below the trimmed revenue guidance range of $2.81 billion to $2.82 billion issued by the management of Baidu for the second-quarter.

The company landed in trouble when Wei Zexi, a 21-year old student, died due to an alternative treatment he took for the treatment of cancer. The Chinese authorities allege that the student found the advertisement for the alternative treatment through Baidu’s online search. In May, Baidu was hit with a ban on healthcare related advertisements.

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The company acknowledged that it would lose a considerable portion of its revenue due to the existing ban. Earlier in January, the company faced a similar issue. According to the analysts at Nomura and Daiwa, Baidu generates 20% to 30% of its total revenues from the health care sector. Online search contributes to nearly 84% of the company’s revenue.

Considering the issues faced by the company, Baidu’s management issued a weak revenue outlook for the third-quarter of fiscal 2016. The company expects Q3 2016 revenue to be in the range of RMB 18 billion ($2.714 billion) to RMB 18.5 billion ($2.796 billion), down 1.1% on a y-o- y basis. Thus, we expect the stock to remain range bound with bearish bias in the current quarter.

The stock has begun to descend after facing heavy resistance at 198. The stochastic oscillator, which is moving in the overbought region, is also indicating a high probability of a decline in the stock price. Thus, in the case of Baidu, considering the issues surrounding the company, we believe that the stock will decline to test the major support S1 at 170.

Based on the forecast, we suggest trading a one touch put option through a reliable binary broker. A strike price of $180 or higher and a contract expiry date in the final week of October can be selected for the recommended put option trade.