10.7 Million Bearish Bets on Baidu Could Be Wrong

China's leading search engine has its highest short interest in years, but the future won't be as dark as the present.

Rick Munarriz
Rick Munarriz
Jul 8, 2019 at 3:05PM
Technology and Telecom

The naysayer count continues to spike for China's leading search engine. There were nearly 10.7 million shares of Baidu (NASDAQ:BIDU) sold short as of mid-June, the stock's highest short interest in years. The number of shared betting on Baidu stock to fall have nearly tripled over the past year. 

It's as popular as it is easy to hate on Baidu these days. The stock is close to buckling below $100, something that it hasn't done since the summer of 2013. Financially speaking, Baidu isn't at its best these days, but is the pessimism overdone? Let's go over why the nearly 10.7 million shares of Baidu sold short can be in for a world of hurt at this point.

Baidu research executives posing in front of the Baidu front desk with the Baidu logo on the wall behind them.

Image source: Baidu.

Bouncing back is what Baidu does

China's dot-com pioneer is going through some tough times. Baidu posted a quarterly operating loss for the first time in its nearly 14-year history as a publicly traded company in its latest quarter, and even if its adjusted profit plummeted 80% for the period. Revenue for its bread-and-butter online marketplace business slowed to a 3% year-over-year increase for the quarter, and its guidance in mid-May for the quarter that ended last week was even more problematic. Baidu's targeting revenue to check in between a decline of 3% and a gain of 2% for the second quarter, or up 1% to 6% if you only look at its continuing operations. 

Growth investors aren't happy with the sharp deceleration, but Baidu has overcome setbacks and slowdowns before. It has a history of bouncing back. The shares have taken a beating since peaking 14 months ago, but the stock is still a 42-bagger since its IPO 14 summers ago. 

Bears will argue that the large short interest with the stock in a lull proves their point, and that's fair. However, short interest was less than 7.2 million in mid-May just before Baidu announced its poorly received quarterly update. Roughly a third of today's shorts came in after the earnings hit, which is essentially where the stock is now. 

Baidu continues to be the undisputed top dog in search in China. It has used its strong position with consumers and advertisers to roll out new initiatives, including some like self-driving cars that won't pay off right away. As patient investors wait out the bounce, you have a cash-rich leader in the world's most populous nation that is fetching an enterprise value that is just double its trailing revenue. The stock isn't perfect, and it may be hard to see the catalysts that will trigger a short squeeze when growth is slowing and margins keep contracting. Baidu will always be volatile, but that also means that the bad times aren't permanent. As China's economy recovers and some of Baidu's future bets start to pay off, folks will regret betting against Baidu.