However, Google left China in March 2010 after its founders decided they no longer wanted to comply with Chinese censorship restrictions. This decision led to Baidu doubling over the course of the next year. In the last six months, Google's Chinese market share has dropped precipitously.

But now there are several Chinese companies showing great interest in coming after Baidu in search. Alibaba has said it wants to do this in the future. Smaller Qihoo 360 ( QIHU) has shown the most ambition to get into the space and started to take some real market share in the PC space at least, around 10%.

At the same time as newer competitors are starting to salivate at the possibility of getting into the space to compete with Baidu, Baidu has been showing decelerating growth. Its most recent quarter reported in October showed the slowest growth of any quarter they've reported for the last two years.

Adding to the concerns of Baidu longs is that Baidu's valuation is still sky-high. The forward P/E is 11.5x. The price-to-sales is over 10x. The enterprise value-to-Ebitda is over 16x. If Baidu continues to show soft growth, investors might start punishing the shares.

Baidu's stock is already off one-third from its all-time high of $154/share. But it could get worse in 2013.

Baidu's market cap is now at $33 billion. Meantime, Tencent is up at $60 billion. Alibaba is prepping to IPO in 2013 and could be valued as high as $80 billion when it does go public.

China's three Internet giants are going to become two in 2013.

At the time of publication the author had a position in YHOO.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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 www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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