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Will Facebook Frenzy Fizzle for China Internet Stocks?

Again, DANG is not Amazon (AMZN), despite the fact that is it is a much used analogy used to hype the stock. Taobao.com is the dominant site in China, followed by 360buy.com, then DANG. Traffic at Taobao is nearly triple that of DANG, and an unfortunate reality in China is that Taobao's willingness to sell pirated goods means that it can attract far more consumers at a cheaper price than DANG. (For reference, I include this link to a pirated CFA study program on Taobao. It is identical in every way but sells for only 10% of the cost charged by Schweiser.)

Both of these larger competitors, Taobao and 360buy.com, have been rumored to be pursuing IPO's as well. So the question for the long term for DANG is how long the company can keep reporting accelerating losses to keep pace in a price war with competitors who sell products at 50% to 90% lower prices. Now that it has doubled to $8.34, DANG is a great short, but it could easily power higher due to Facebook frenzy, so it is one to be cautious with. I am watching day by day.

If there is one analogy which is correct among these stocks, it is that YOKU is the YouTube of China. YOKU's site is fantastic and content is amazing. YOKU is sitting on a large pile of cash and has been using it as a weapon to bid up the price of content, trying to price competitors such as TUDO out of the market. So far it seems to be working, but the added costs are having the predictable negative effect on YOKU's bottom line. Last quarter, the stock saw a 30% run up into earnings and then plunged when it reported an "unexpectedly large loss." I was short after the pop in the stock based on the widespread reports of the content price war that YOKU was leading. It was almost inevitable that the bottom line was going to be affected.

Likewise, the effect of DANG's price war with Taobao and 360buy.com is going to have a very predictable effect on the bottom line. I made this prediction before YOKU earnings came out, and I am now making it again with DANG.

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