Betting Against Baidu Is Fatally Fashionable

The naysayers are turning out in record numbers, and that's a good thing for Baidu .

The stock exchanges are out with their latest reports on shorting activity, and there are more people betting against China's leading search engine than there have been all year.

There were 13.9 million shares of Baidu sold short as of the end of May, and that's more than the 12.3 million bearish wagers that NASDAQ reported for Baidu in its previous report for activity as of mid-May. If you want an even more dramatic snapshot, consider that the number of shares sold short over the past year has ballooned since the 5.2 million shares shorted a year ago.

If you think that this is just a China thing, you're wrong. Many of the China's more volatile growth stocks have actually seen dramatic decreases short covering over the past year:

• Renren has gone from more than 19 million shorts to 4.3 million over the past year.

• Dangdang has seen its short interest shrink from 8.7 million to 2.3 million.

• SINA has gone from 9 million shares to just 2.6 million shares sold short.

It's not as if those three dot-com bellwethers are Internet darlings.

Renren -- China's leading social networking website operator -- continues to lose money, and growth these days is being spearheaded by online gaming and its daily deals initiative. Internet marketing revenue rose by less than 5% in its latest quarter.

Dangdang has seen its stock nearly double over the past month -- already setting itself apart from the slumping Baidu -- but it's not as if the Chinese online retailer is any closer to turning a profit. Wall Street doesn't see Dangdang turning a profit until 2015 at the earliest, making the recent short squeeze that much more puzzling. Dangdang probably isn't nearly twice the company it was just a few weeks ago.

Unlike Renren and Dangdang, at least SINA is profitable. However, the online portal operator behind the popular SINA Weibo micro-blogging platform isn't growing as quickly as Baidu, Renren, or Dangdang. Despite finally the taking the initiative to monetize Weibo, analysts only see revenue growing 18% this year. Baidu is expected to grow its revenue at double that pace.

Baidu just isn't getting a lot of respect these days. It's not the niche. Rival Qihoo 360 has been one of the better-performing Chinese stocks over the past year, and its short interest has contracted from 15.3 million to 11 million over the past year.

Critics will argue that Qihoo 360's ascent is exactly why Baidu is being dissed by a growing number of bears willing to put money on their negativity. Qihoo 360 is gaining in popularity, and that's eating into Baidu's growth.

Really? Did investors miss the part about Baidu growing its revenue at a 36% clip this year? Even if we look out to 2014, next year's 29% growth rate isn't too shabby. When you consider that Baidu is trading for less than 16 times next year's projected profitability -- Qihoo 360 and SINA have multiples of 26 and 30, respectively -- it's easy to wonder if the bears are getting too greedy here.

Yes, there will be challenges for Baidu. However, the juiciest opportunity right now may be the 52-week high in short interest. All it would take is just a positive catalyst or two to get a short squeeze going as those 13.9 million shares sold short would turn into buy orders to zero out those positions.

Baidu is clearly out of favor now, but the larger the number of shares sold short, the stronger the rally will be if the fallen dot-com darling resumes its winning ways.

All about Baidu
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The article Betting Against Baidu Is Fatally Fashionable originally appeared on Fool.com.

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu and SINA. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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