Saint Rantic

Are we staring at bubble 2.0? I certainly think so!

Consider the case of the Chinese search Engine:- Baidu! Baidu went for an IPO sometime ago and guess what :- they are now valued at $3 billion (Source) and some claim that its near $5 billion(Source). I am no economist, though I have a strong economic orientation, but I would say that this either shows over-confidence or foolishness. Over-confidence, though not necessarilly always, is a sign of foolishness.

A market cap of $5 billion is a HUGE thing. What this means is something like this: Say the Chinese net browsing population is something like 400 million, and say 80% of the people use Baidu. This means that the advertizers have partial access to some 320 million chinese, which is a very substancial thing because it represents a critical mass of people which can generate a substancial ‘advertisable’ base. Let us for the moment (highly) optimistically assume that the net browsing population will double in the next 10 years. That means Baidu will generate enough revenue of about $ 8-10 billion ($5 billion is the discounted valuation) in the coming years by selling ad-space to advertizers who intend to benefit from the , undoubtedly large, net-savy population of China!

If that does not ring a bell (I ain’t no economist ) then consider the side-effect of the above: To spend $8-10 billion in advertizing, the ad companies have to allot a percentage of their profits (which is an indicator of the growth of the economy , something also related, in some sense, to the risk free rate of returns), lets say they allot some 20% of their profits to advertizing. And say some 60% of that goes into i-net advertizing. That means 12% of the profits go to advertizing. Which means that the companies that do business with Baidu should make around 80 - 100 billion $ (i.e they should be valued something like 45 - 50 billion $ now) in profits in order for the market cap of Baidu to be the same as its true value. If I were having stocks of Baidu now… there is one thing that I should be doing SELL! You decide!

Philosophically, this more or less represents the trouble with the internet or to be more precise ‘high-tech’ firms! The valuations are hyped up by innacurate information and incommensurable entities. This was , in my opinion, the reason for bubble - 1.0. Everyone who had some amount of money was going tech-savy, over-valuing everything that was remotely related to i-net. This is the next generation bubble, which has become more mobile, more technologically nascent and more irrational.

May the bubble Hail!