I didn’t think I would revisit the subject of Baidu so soon, but after Baidu.com skyrocketed 354% in its first day of trading on the NASDAQ, I knew I had to write about it tonight. Most of the World Adventurers blog visitors this week seem to want to know what I have to say about Baidu, so I just had to write something about it. For those tired of reading about financial topics, I promise to write about another subject tomorrow.
In case you’re wondering whether you should still buy Baidu, I want to let you know that think it would be crazy for you to buy shares of Baidu at $122.54 per share. I reiterate that I would not pay more than $25/share for share this company, no matter how explosive demand appears to be. If your heart was set on buying shares of a Chinese Internet play, then check out Baidu’s main competitors, Sina.com and Sohu.com. Their multiples are much more reasonable than Baidu’s. Baidu’s astronomical share price primarily reflects two unproven assumptions: 1) Google will eventually buy out Baidu; and 2) Baidu will be the next Google. Neither assumption is necessarily true. Right now, there is just too much risk involved in buying Baidu shares. Yesterday shares of Baidu.com topped out at $151.21 in mid-day trading and ended the day much lower. Suckers who bought shares at $151 are likely wondering now why that bought into the hype and bought so high. I’m positive that the price will drop over the next few weeks as the hype subsides, perhaps by as much as 50%. Baidu.com’s first day share price gain was the 18th highest in history, and it was the hottest foreign IPO in history. That is an amazing achievement for a company with just $15 million in revenues. Considering that the 17 other hotter IPOs occurred during the dot.com boom era, and Baidu far outclassed Google in its debut, its achievement is even more noteworthy. At the same time, it’s important to remember that this is no longer the dot.com era, when share prices of Internet companies floated into the stratosphere. In this brave new post-dot.com era, share prices are much more firmly anchored to business fundamentals. One bad earnings announcement will deflate Baidu’s share price fast as quickly as it was inflated by hype.
As for me, I did not buy any shares of Baidu because I kept my bid at $25/share. Sometimes you win , sometimes you lose. However, I am very happy to know that I was able to anticipate another winning initial public offering. Baidu caught my eye weeks ago. It’s just too bad that so many other investors anticipated it too. I’ve been pretty successful at sifting through all the IPOs to find the gems. I bought into Google and Morningstar, two great IPOs, and I passed on CryoCor, which is now hovering $3 below its IPO price. I most certainly would have participated in the Baidu.com IPO if I had had the opportunity to do so. However, Baidu participated in a traditional IPO led by its underwriters, Goldman Sachs and Credit Suisse First Boston. As I have often mentioned, I am no fan of traditional IPOs. Aside from enriching company executives, angel investors, investment banks, lucky guests, and a few high net-worth individuals, traditional IPOs rarely benefit the average investor. They don’t benefit the company, either. The company sells shares at an intial price, in this case $27 per share. When Baidu’s share price skyrocketed to $121.22, the only ones who benefitted were those individuals fortunate enough to be allocated shares. That is why I am a firm believer in Dutch auction IPOs, which allows all investors an equal opportunity to bid on shares, and the price more accurately reflects demand, giving participating companies a fairer price for their shares. Traditional IPOs are very elitists, while Dutch auction IPOs are much more democratic.
If you want to participate in IPOs, remember that they are inherently volatile and are prone to underperform. Most companies’ share prices dip below the initial price after going public. Thus, you need to be diligent and know a company’s prospects, weighing the risks with the benefits when considering whether to buy on the first day of trading. It is often better to wait and see how the stock performs, such as I did with DreamWorks Animation and Cogent Technologies (I bought DWA three weeks after IPO, Cogent seven months afterward). Because it is very difficult to receive an allocation of shares in a traditional IPO, you will have to buy on the first day of trading. Bid low at first, wait until you assess the price at opening, and determine whether you can stomach buying at a much higher price, then up your bid price. If the price hovers around the initial price, or if it dips below the opening price soon after trading begins, then don’t bid at all. Wait. A hot IPO is hot from the get go; lukewarm IPOs have very little upward price momentum. If you want to participate in an initial public offering, open a brokerage account with a broker such as E*Trade that participates in IPOs, or open an account with W.R. Hambrecht. Hambrecht has a stellar Dutch auction IPO program called "OpenIPO." I have an account with Hambrecht and have been very pleased with the results. Not every IPO is promising, so be patient. At present, I am keeping my eye on only one upcoming IPO–Tim Hortons. If I see any other promising IPOs, I will let you know.
The market is so fickle! The economy added 207,000 new jobs last month, 20,000 more than expected. That sparked fears that the Federal Reserve would continue to raise interest rates, sending U.S. stocks lower on Friday. Job creation has generally lagged expectations since 2002, and each month the markets punish investors when the job numbers come in lower than expected because of fears of a weak economy. Now they’re too high. You can’t win! C’mon, investors. Wise up. I for one am glad to see more jobs created, even if the Federal Reserves continue to raise rates. Fed Chairman Alan Greenspan has said as much. The market needs to accept the fact that oil will continue to be $60+ a barrel for the foreseeable future and that the Fed will continue to raise interest rates.