Tuesday, August 09, 2005

Like the Old Days: The Baidu IPO

Baidu is China's Google.

Based on this information, last Friday Wall Street gave a company that did a $15 million in revenues last year a $4 billion dollar market capitalization.

Notice anything eerie?

Yep, looks like the Bubble all over again.

While Baidu is the dominant search engine in an emerging economy, I cannot fathom how a company whose net income in 2004 was a paltry 1.5 millon can raise $100 million dollars in the capital markets.

I thought after the Crash, days like these were over.

The Wall Street Journal said that Friday's IPO captured "the biggest first-day gain since the heady days of the dot-com boom."

Some things never change.

It's clear things are out of whack again in the stock market.

First of all, investors got too giddy because Google has a minority stake in Baidu (looks like another masive paypday for Google insiders).

Second, Baidu's fundamentals are totally out of sync with their current valuation, as I suggested above.

Search is a maturing market.

If anything, Baidu will be bought out rather than them developing any new and unique product or technology.

Third, investors should know that Chinse users are less dependent on one search engine.

Ultimately, I think Baidu will turn into another day trader's stock.

The average trading volume (22M) is 5x the number of shares outstanding (4M).

Which means that each share exchanges hands five different times before the market closes at 4Pm.

First day "pops" on IPOs are great for early investors and insiders, but not so great for current and future employees of the company, who typically watch their morale drop as the price of the stock does.

But for the bankers and insiders, Friday's offering was an obvious windfall.

Wall Street isn't about small investors or company employees.

That's a fallacy.

Wall Street is about bankers and institutions.

And IPOs are about timing.

With Chinese stocks still in the hot zone, the Baidu IPO was ripe for the picking.

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