Here’s why the Baidu stock may crash further as a risky pattern emerges

Baidu stock price has slumped hard in the past few months as its advertising business has come under intense pressure. It retreated to H$112.3 in Hong Kong, reaching its lowest point since April 14. It has dropped by 30% from its year-to-date high and formed a risky head-and-shoulders pattern, pointing to further downside.

Baidu stock has formed a head-and-shoulders pattern

Technical analysis suggests that the Baidu share price has more downside in the near term. It formed a large down-gap on June 5 as the technology sell-off gained steam. 

The stock has crashed below the 50-day and 200-day Exponential Moving Averages (EMA). It also retreated below the 50% Fibonacci Retracement level at H$116. 

Worse, Baidu has been forming the highly bearish head-and-shoulders pattern. Its head was at $160, while the left shoulder was at $140, while the right shoulder was at $145. The neckline was along the 61.8% Fibonacci Retracement level of $106. 

Therefore, the most likely Baidu stock forecast is bearish, with the next key target to watch being the neckline at $106. A move below that level will point to further downside, potentially below $100. 

Baidu stock chart | Source: TradingView

Baidu’s business is sending mixed signals

The ongoing Baidu stock crash is a sharp contrast to what is happening with Alphabet, its American peer. Alphabet (NASDAQ: GOOG) stock has jumped by 1o0% in the last 12 months and 188% in the last five years.

The most recent financial results showed that Baidu’s legacy business, which generates the most revenue, reported 26 billion yuan in revenue, down 29% YoY and 18% QoQ. This retreat happened as demand for digital advertising in China continued falling. Unlike Google, which has a global presence, most of Baidu’s advertising revenue comes from China.

On the positive side, the company’s AI business is doing relatively well. The Core AI-powered business revenue jumped by 49% to 13.6 billion yuan in the first quarter. It had previously generated 9.1 billion in Q1 of last year. 

As a result, Baidu’s total revenue dropped by 2% QoQ, and analysts expect that its annual growth will be smaller than other companies. The average estimate is that its annual revenue will grow by 3% this year, followed by 7.3% next year. This growth will be driven by its AI business.

Meanwhile, Baidu stock price retreated after the United States listed it as a Chinese military company. This expansion means that it will be illegal for American companies to offer their services to Baidu and other firms like Alibaba and BYD. This addition may make it hard for Baidu to receive Nvidia’s H200 chips.

The next key catalyst for Baidu shares is the upcoming Kunluxin IPO that will value it at over $14.7 billion. Kunluxin is its chip design and development business that is gaining market share in China. 

The company is also benefiting from other areas as its advertising business slows. For example, it has become a major player in the robotaxi business, where it has offered millions of miles in the past few years.

Baidy has become a relatively undervalued company, with its forward PE ratio being at 17.5, lower than Google’s 25.