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 it would not be for another 3.5 years after Yahoo!'s IPO that the "dot com" bubble burst.

I think we still have another four years of growth ahead of us in the Chinese tech world. Buckle up: it's going to be a fun ride.

But, here's a question for you: If there is a revaluation going on in the Chinese Internet world, it has so far eluded the biggest Chinese Web company in the world (at least, as I see the Chinese Web world playing out over the next five years).

Tencent and Baidu may be the big dogs today with $50 billion market capitalization each. And they will likely triple in size over the next five years, as the wealth of Chinese people increases and Internet penetration doubles or triples from its current levels.

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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Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at or @ericjackson.

You can contact Eric by emailing him at