Baidu.com is basically the Chinese Google and things have been (for the most part) good for Baidu. In fact China has even allowed Baidu to effectively become a legal monopoly by keeping international competitors out of the country. Massive growth and strong margins make this a really tempting buy, but is it a falling dagger?

I’m personally considering a LEAP option on Baidu, but ultimately I know it’s a highly volatile stock. Even if revenues continue to grow, it might not be to the levels that investors desire. With a P/E of 22.5x it might seem like a logical buy, but in my experience I’ve seen that when investing in foreign equities, it’s common that a lower P/E is desired by investors.

There are of course concerns by a lot of analysts and bloggers. They argue competition is growing within China and that Baidu is not as good as Google technology wise, and it’s hard to argue against those points, but it just has so much upward potential. If this company effectively does become the Chinese Google long-term, this stock is a complete steal.

It’s kind of funny that Baidu is currently trading at almost the exact P/E that Google is currently trading (22.5 vs 23.2), but I find it unlikely that Google has the upward revenue potential (proportionally) that Baidu has.

So what’s the play? For about $26.40 you can buy the nearest in the money option with a Jan 2015 expiration. This of course would result in a “hail mary” type investment, but it could pay off. If growth continues, this stock is likely to see $200 or possibly higher by Jan 2015 (in my opinion). If growth stops or slows down to a crawl, this stock is likely to tank below $100 a share.

So what’s my actual play?

Hope for a downward move before investing. Although I believe these is a ton of upward potential, I just can’t pull the trigger. I feel there are better gambles, and the option chains are not enticing enough for me. I will however be very interested if this stock gets it’s P/E a little lower (below 20ish). I might also consider a non-LEAP option before earnings, but for a much smaller wager.

Legal Monopoly or not, revenue growth is going to make this stock swing for years.

 

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