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Friday, August 05, 2005

Why Baidu (BIDU) is not this bubble's VA Linux (LNUX)

Wow. Baidu crushes with a 354% first-day gain with its IPO today. Boy, there are a lot of scary parallels to the Internet Boom a la 1999. If anyone cares to reopen those memories, they'll find another stock that blew away previous IPO first day records: VA Linux! Remember those bad boys of Open Source software? Oh yeah, Larry Augustine and his merry band of tech geeks rang in an innovative new business model that consisted largely of giving software away for free.
That led to this horrific chart. Now we know that Open Source is just about giving really good programmers employment for life by making all software services-based. Hell of a business model.
However, I Baidu is not the next VA Linux. Baidu could be undervalued here.
Yes, the stock may pull-back tomorrow if the market decides to puke based upon rememberances of what Tequila did the last time we partied. Regardless, Baidu has two very proven variables that will make this a company and force to be reckoned with in the future:
  1. The business model has been validated - Internet search has demonstrated itself to be THE MOST LEVERAGABLE BUSINESS MODEL IN THE WORLD. All you need is a scalable website and significant end-user mindshare as the place to look for stuff. That's it! Then you get to charge people to put ads next to the search results! People still don't get the significance of this business even after Google proved it out. Look at it from an advertisers' point-of-view: would you rather pay to be in a magazine that is related to your products and hope that you're in the place that captures the eye of a potential customer? -OR- would you rather have your advertisement presented at the exact time that someone searches for "camper shells in Lincoln, NE"? Exactly. Don't doubt that Baidu has one of the most profitable business models in the world. All they have to do is make it look a lot like Google. Believe it or not, Google ain't rocket science folks.
  2. They are in the biggest and fastest growing end-customer market in the world. (Favorite quote from that link: "[population] increase is 14 million...equal to a new Australia every year". If you don't believe in the growth of consumers (and advertising) in China, then you need to stop investing and get a new line of work.
Now, I'm not a hippy-dippy, dot-com cheerleader that drinks Kool-Aid. I can be as cynical as the rest of them (see my posts on HPQ). Honestly, I think Baidu will encounter an obstacle somewhere down the road and the stock will pull back and then I'll look seriously at it.
But don't throw rocks at the business thinking this is like all of the shitty companies that came public during the first bubble. A lot of people in Silicon Valley learned a some good lessons and considering the All-Star line-up of people involved in Baidu, I think this stock will meet expectations in the long run.

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