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TheStreet Open House

Will Facebook Frenzy Fizzle for China Internet Stocks?

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) -- One year ago, shares of Molycorp (MCP) and Rare Earth Elements (REE) were each up by several hundred percent in a few months due to an investor-buying frenzy for all things related to rare earths. Many investors piled into shares of tiny fluorite producer Shenzhou Mining (SHZ), which was trading below $1.

Within weeks, SHZ ran to over $10 -- a quick return of more than 1,000%. More stunning was the fact that SHZ wasn't even in the business of producing rare earths, it was just mistakenly lumped in with the sector. For a while the "greater fool theory" held and the stock continued to skyrocket, but once the party ended, shares of SHZ plunged back to $1 to $2. For those who piled in at the top, they are looking at potential losses of 80% to 90%.

We are seeing the exact same thing again with "social media" stocks. The hot stock driving the space is now the impending IPO of Facebook.

Despite the fact that everyone knew the IPO of Facebook was nearing its filing with the SEC, and even had an idea of the proposed valuation (up to $100 billion), a Wall Street Journal article on Friday discussing the impending IPO led to frenzied buying of anything related to social media. This included most of the Chinese internet space.

Shares of RenRen (RENN), mislabeled as the "Facebook of China," surged as much as 30% (36% in after hours) and Sina Corp (SINA), which runs China's most popular mini-blog service, jumped as much as 15%. This buying of internet stocks set off a quick chain reaction, spreading to most of the Chinese internet space as a whole (even non-social networking stocks). Shares of eCommerce China DangDang were up by nearly 20%, Baidu (BIDU) was up 7% and Youku (YOKU) was up 13% .

In December, investors had seemingly given up on RENN completely. The stock traded as low as $3.21, roughly equal cash per share. The conclusion, it seemed, was that RENN's business was worth precisely zero and the company was only valued for its cash. Since that time, very little has changed with RENN, except that it has continued to lose money and burn more of its cash, yet the shares are up 63% and the run up shows little sign of slowing down.

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