NEW YORK (TheStreet) -- China Internet stocks are on fire. The unstoppable SINA (SINA - Get Report) is now up 106% year-to-date. SOHU (SOHU) is up 56%. Baidu (BIDU - Get Report) is up 53%. Even new IPO Youku (YOKU) is up 94% year-to-date.We are now starting to see new Chinese companies rushing to list their stocks on the U.S. exchanges. Dangdang ( DANG) has managed to hold a price at a big premium to its December IPO. Qihoo 360 ( QIHU) is another high-flying IPO from last month. RenRen(RENN), the "Facebook of China," is planning to list next month. The more these relatively smaller stocks go up, the more it seems that the bigger Chinese portal names keep going up. Look at Sina's performance in the last two weeks alone for evidence of that. China observer and investor Bill Bishop said on Tuesday that he thinks there is a revaluation going on in the Chinese Internet sector: Most U.S.-Listed Chinese Internet stocks are soaring, with some up 10%+ Monday, and some up 30% or more in a matter of weeks. Many of these firms, like Baidu and Sina, have great businesses and massive growth prospects, but the surge seems to be about more than just fundamentals.Are investors in relative valuation mode, believing that because immature firms like Youku (6.7B market cap), Qihoo (3.7B) and RenRen (planned IPO valuation is $4B+) are so richly valued, then Sina, Baidu, Sohu, Shanda et al are dramatically undervalued on a relative basis?There is logic to that argument, and it can sustain high valuations for a while, especially given the great wall of money that is both being reallocated to China by Western funds and is sitting in Chinese hands looking for speculative opportunities. I agree with his logic. I think this revaluation is going on. And I agree with him that this is not a bubble. It could grow into one -- but we have a long way to go. In "dot com" era terms, I would characterize the current Chinese tech sector as being in the equivalent of the fall of 1995. Netscape went public that year in August. As its price held up for the first few weeks after, it made people reconceptualize the value of tech. Yahoo! ( YHOO) went public in April 1996. And, after that, the race was on for tech billions.
But, for my money, the biggest dog in the Chinese Internet universe will be the twin companies Taobao and Alipay. Morgan Stanley came out with a research note recently that estimated that 2-3% of all retail sales last year in China were done over Taobao. What's more, 50% of all intra-China deliveries last year were for Taobao-related goods. This is why Taobao just made a multi-billion dollar commitment in January to build out additional distribution centers across the country. Based on research I've done on public statements in the Chinese universe, I would estimate that, if Taobao and Alipay were to go public today with moderate (not even Youku-sized) investor enthusiasm, both companies would have a combined valuation of $65 billion. And guess what? Thanks to a masterful deal orchestrated by Jerry Yang in 2005, Yahoo! owns 40% of those two companies. And that $65 billion valuation is where they are today. If Baidu and Tencent are going to triple in value over the next five years, why won't Taobao or Alipay? 1.3 billion is a lot of people. No wonder Mark Zuckerberg wants Facebook there. So, when I hear investors or business journalists ask if Yahoo! is going to shed their stakes in Taobao and Alipay after they work out a deal for Yahoo! Japan with Softbank, I ask: "Why would they?" That would be one of the most colossal blunders in business history. Now, I do expect there are discussions going on between Alibaba's parent company (who owns Taobao and Alipay) and Yahoo! about possibly selling part of Yahoo!'s stake back to Alibaba prior to an IPO. I expect some win-win solution to be figured out. It might take a clear IPO date for Taobao and Alipay before investors properly reward Yahoo! with a proper valuation, which, in my view, would be a stock price over $30. However, as the Chinese Internet keeps heating up, it is simply a matter of time before there is a massive revaluation of Yahoo!'s shares to reflect this. Eric Jackson held a long position in SINA, YHOO, and BIDU and a short position in YOKU at the time of publication.
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