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Baidu Still Can't Shake its Shorts

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Baidu (NASDAQ: BIDU  ) continues to court naysayers.

There were 15.5 million shares of China's leading search engine sold short as of June 14. That may not seem like a big number, but when you consider Baidu's share price, we're talking about nearly $1.5 billion betting against the company.

Baidu has seen its number of shares sold short nearly triple over the past year, and the mid-June mark tops the record of 13.9 million shares being held short at the end of May.

Why are so many investors down on Baidu these days? The emergence of Qihoo 360 (UNKNOWN: QIHU.DL  ) as an alternative search engine has been the biggest contributor to Baidu's downfall.

The Web browser and security software specialist has turned heads since rolling out its own search platform last summer. Despite the stock running up in response -- Qihoo shares have nearly tripled over the past year -- the push higher has helped shake loose some of the skeptics. Qihoo 360's short interest has fallen from 14.8 million to 17.9 million over the past two months!

Baidu would love to trigger that kind of short squeeze.

Naturally a good way to get that started would be to start gaining market share in search again. Qihoo 360's growth has come primarily at the expense of smaller players, but investors would be comforted by seeing either Baidu's market share grow or Qihoo 360's growing piece of the market take a step back.

Encouraging financial results could also send the cynics scrambling, but that won't be easy. Analysts see flat earnings growth when Baidu reports in three weeks, and Baidu has actually come up short in its two most recent outings.

However, bulls should still approach the growing short position as a positive. Baidu is now trading at a trailing earnings multiple below 20, and that drops to the mid teens if we look out to next year's Wall Street projections.

Baidu will naturally have to earn a short squeeze, but when it happens, it's going to be a welcome sight to see $1.5 billion in bearish wagers covering their positions.

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Related Tickers

9/27/2016 4:00 PM
BIDU $190.83 Up +1.97 +1.04%
Baidu CAPS Rating: *****
QIHU.DL $0.00 Down +0.00 +0.00%
Qihoo 360 Technolo… CAPS Rating: **