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TheStreet Open House

A Dose of Reality Needed for China Fever

Stock quotes in this article: DANG, RENN, YOKU, DATE

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING ( TheStreet) -- Despite the fact that nothing has fundamentally changed in the China internet space over the past two to three weeks, U.S.-listed China Internet stocks have skyrocketed across the board. Some of the larger benchmark names such as SINA, SOHU and BIDU were clearly oversold at the end of 2011 and have rebounded substantially. However, it should be cause for concern when even the weakest names in the space rip higher along with the major players, even as these weak players are showing deteriorating financials.

Some of the largest gains have been seen for companies with the weakest fundamentals and weakest prospects for profitability. This clearly smacks of an unsustainable short term bubble, much of which has been fueled by short covering. Once the boost from short covering ends, these names could all see quick and substantial drops back to their December levels. Most notable are the mostly misnamed "catch phrase" stocks shown below:

Arguably Renren (RENN) was too cheap at $3.21, a price that valued the entire company only for the cash it had on hand -- over $1.2 billion. RENN could easily build a future through a series of acquisitions and has plenty of cash to do it. But that doesn't change the fact that RENN is simply not the Facebook of China, but rather will likely prove to be the Friendster of China and not last in the long run. The share price certainly reflects this sentiment by investors. In the $4 to $5 range, RENN is probably priced about right, as a cash rich company without strong business prospects going forward.

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At a price of nearly $21, Youku (YOKU) is a $2.4 billion dollar company that has never turned a profit and is seeing losses accelerate. The stock saw a strong run up above $20 heading into its last earnings call and then plunged when it was revealed that costs for content had increased dramatically and losses therefore widened significantly. Now the stock has rebounded again to above $20 without any meaningful developments to drive it higher. YOKU is simply riding the rising tide for China internet stocks. I was previously short YOKU from $21, but covered my position once the stock started to rebound from its lows. If the stock gets back to $23, I will eagerly short it again and hold through the next earnings call.

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