Saturday, February 04, 2006

China Fever Defies Logic: BIDU

If you are at the movies and someone in the crowd yells "fire," everyone will probably run for the doors, right?

The same thing happens everyday in the stock market.

Crowds either panic or lapse into irrational exuberance, killing or boosting stock prices irrespective to reality.

When (BIDU) went public in August, the stock soared to almost $150 dollars.

We immediately put a $60 price target on the stock.

Six months later, Baidu has not only hit, but also passed through our price target.

Today, shares are down 70% from where we told you to get out.

The academics have it wrong -- the market isn't perfectly efficient.

But, it is hard to argue that it isn't terribly efficient. Ultimately, if a company's number's don't add up, its stock price will reflect it.

Ignore the fundamentals, and your success in the market, if any, will be ephemeral.

When went public, we were concerned with three things.

First, the company's trailing 12 month revenues were anemic.

The Street, obviously, wasn't as worried -- over night, the company's valuation soared, taking us back to 1999, when pro formas hijacked reality and "profit" became an obscene word to avoid.

Second, we were worried by how quickly investors were calling Baidu the "next Google."

We all know that a company like Google comes around every ten years, not every 10 months.

Lastly, the inherent political risk associated with China's internet policy was too much for us.

China forbids Internet users from publishing independent news reports on the Internet without the government’s permission. Net users are also prohibited from talking about sensitive topics such economic corruption, and cannot publish articles which are critical of the Chinese Communist Party’s leaders. China’s State Department news office specializes in monitoring messages which are spread over major internet channels.

This is not the same milieu that Americans enjoy. was a sell the second it came out of the gate.

It's a shame analysts didn't kneecap the hype as early as they should have.

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