2012 is the year of the Chinese tech stocks

Since the start of the year, Chinese technology stocks have surged higher. That could be due, in part, to last year’s dismal returns, but if the last three quarters of 2012 look as good as the first, there’s lots of money to be made behind the Great Firewall.

Since the start of the year, Chinese technology stocks have surged higher. That could be due, in part, to last year’s dismal returns, but if the last three quarters of 2012 look as good as the first, there’s lots of money to be made behind the Great Firewall.

In fact, all Chinese stocks (not only tech) that trade on American exchanges jumped 14 percent in the first quarter (per Bloomberg). The article sites two reasons for the sudden interest in all things Chinese: an uptick in manufacturing and predictions that the Chinese government will lower reserve requirements.

Still, it’s Chinese tech stocks that have really dominated the show in China in 2012. Here’s a quick look at some of this year’s top performers:

1) E-Commerce China Dangdang Inc. (ADR) (NYSE:DANG). +126% in 2012.
Dangdang.com models itself after Amazon. The company got its start in books and has been adding new product categories ever since. They’re also moving rather aggressively into the e-reader market in mainland China. Dangdang shares got a big boost recently, though, when the company announced a partnership with Gome Electrical Appliances Holding Ltd.

Gome is China’s second-largest electronics dealer, and the company recently started selling its wares on Dangdang. Dangdang may start selling their own wares on Gome’s Web site as well.

2) Renren Inc. (NYSE:RENN). +63% in 2012.
A Chinese take on Facebook, Renren operates the PRC’s most popular real-name social network. The fact that the site requires members to use their real names could actually be a boon as China’s started cracking down on illegal online commenting. Sites like Weibo (a Twitter-like service where real-name requirements are fairly lax) were recently forced to shut down their services for 72 hours as they worked to scrub illegal comments from their servers (again per Reuters). Those service interruptions can only strengthen Renren’s user base.

3) Baidu.com, Inc. (ADR) (NASDAQ:BIDU). +25% in 2012.
China’s most-visited web site is also the country’s leading search engine: Baidu.com. Baidu is the fifth most-visited Web site in the world with a global reach of more than 11 percent (meaning 11 percent of everyone in the world visits the site on a daily basis, per Alexa). Baidu’s revenues for Q4 in 2011 rose 82.5 percent over the corresponding period in 2010.


Qunar IPO: 5 reasons to invest in China’s travel site

Baidu did it. Now, it’s our turn. Five reasons to consider investing in the Qunar.com IPO.

We don’t have a Qunar IPO date yet, but the company has announced plans to debut on U.S. stock exchanges next year. Here are five reasons to consider investing in Qunar.com:

1) Reach. Since Qunar.com’s launch in February of 2005, the Chinese travel site has become the 84th most popular Web site in China (per Alexa). In Q3 of 2011, it surprised traffic at competitor Ctrip.com (CTRP), and growth looks like it’s still in a powerful uptrend:

The company claims 51 million unique visitors a month. And that’s while online travel bookings are still in their nascent stages in China. Qunar expects more than half of all travel bookings will take place online within three years.

2) Thumbs up from Baidu. Baidu.com (BIDU) invested $306 million in Qunar in June. That makes China’s biggest search engine a majority shareholder in the travel site, and that’s good news. Working alongside Baidu is much better than competing with it. Currently, the companies cross-promote their services and they’re working on developing new offerings together. Getting a stamp-of-approval from Baidu practically guarantees the site will be the No. 1 travel site in China for years to come.

3) Monopoly anyone? Qunar has very little direct competition in China. Ctrip.com International, Ltd. (NASDAQ:CTRP) qualifies but only loosely. Ctrip acts more like an old-school travel agent processing a large number of offline bookings via call centers. Qunar makes 80 percent of its revenue off advertisements that pop up alongside results on its travel search engine (per the Wall Street Journal). As the company expands the ability for users to actually book travel online, revenues should climb.

4) Buying binge. Part of the reason Qunar plans to go public is to raise cash to help finance future acquisitions. That should help the company consolidate it’s position at the top of the market and immediately boost revenue for the company. While we haven’t seen any numbers, Qunar claims it’s already profitable. Growing it’s profitability without bloating its staff of 800 will be key moving forward.

5) Mobile ready. Qunar’s dumping lots of that investment capital it got from Baidu into mobile apps. Currently, the site’s got the No. 3 iPhone App in China, the No. 3 Nokia Symbian App, and the No. 15 Android app. The company has said it plans to expand its mobile offerings over the next year – particularly for the iPhone, iPad and Android. That should help as the mobile Internet market in China dwarfs that of the U.S. with more than 277 million mobile Internet users accessing the web behind the Great Firewall in 2009.


Five reasons to invest in Taomee IPO (TAOM)

Although Taomee’s shares fell on their first day of trading, the company’s growth prospects are just too powerful to ignore. Here are five reasons to consider investing in the Taomee IPO.

Ask a random adult in the U.S. if they’ve heard of Taomee, and you’ll probably get a blank stare. Ask a child in China the same question, and they’ll probably say yes. Taomee Holdings Ltd. (Public, NYSE:TAOM) operates the largest online entertainment community for children in China. Most of that community is centered around www.61.com, where Taomee has launched several interactive virtual worlds for children with names like “Seer” and “Mole’s World.” Although Taomee’s shares fell on their first day of trading, the company’s growth prospects are just too powerful to ignore. Here are five reasons to consider investing in Taomee:

1) Fairy tale sales. It’s hard to argue with cold hard cash, and Taomee’s growth has been startling. Total net revenue quintupled in 2010 to $36 million compared to 2009, per the Wall Street Journal. Net income was nearly as impressive during the first quarter of 2010. It almost tripled to $9.1 million.

2) Solid management. Taomee’s chief financial officer, Paul Keung, walks the walk. He was trained and educated in the U.S., so he’s well-versed in the American financial markets. That gives Taomee a leg up over domestically-insulated companies. A series of accounting scandals have shaken investor faith in Chinese ADRs. The fact that Keung’s poring over the books should allay some of those sector-wide fears.

3) Scale. Some 89.6 million children in China between the ages of five and 15 accessed the Internet in June 2010. More than 30 percent of that population (27.3 million) accessed Taomee’s site, 61.com, during the first quarter of 2011, according to iResearch.

4) Multiple revenue streams. In many ways, Taomee’s story reminds me of game-maker Zynga – the creator of the popular iPhone and Android game Angry Birds. Zynga’s success with Angry Birds has poured over into the real world with a line of plush toys and a movie in the works.

Similarly, Taomee is significantly growing its offline presence through children’s books, children’s magazines, partnerships with clothing and beverage makers and several massive film and television projects under development. These aren’t just pipe dreams, either.

According to Beijing OpenBook, two of the Top 5 best-selling children’s books in China last year were based on Taomee franchises. Even more intriguing: Taomee’s co-producing two animated TV series and two feature films based on “Mole’s World” and “Seer.” The company has plans to release more than 100 episodes of its animated series – a fact that should significantly boost traffic at 61.com. The company’s feature films are expected to debut this year.

5) Be greedy when others are fearful. I’m starting to think it could be the best possible time to buy stock in Chinese tech companies. Mutual funds – even stock brokerages – are nervous about shoddy accounting practices in China, and that’s led to wholesale sell-offs for a number of New York-traded Chinese stocks. You know it’s bad when even Baidu.com, Inc. (NASDAQ:BIDU) isn’t immune. The Chinese search engine company has shed nearly 20 percent since April. That makes the high-powered growth at companies like Taomee particularly attractive – provided, of course, the numbers we’re seeing are genuine. If they’re true, though, Taomee could be a bargain.



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Tudou IPO: Is Tudou stock a buy?

Tudou’s IPO will face stiff competition in Youku.com (YOKU) and Baidu’s (BIDU) Qiyi.com, but the company’s convinced it will soon emerge as China’s largest online video site.

Despite some catty disagreements between Tudou Holdings’ CEO and his ex-wife, it appears the online video sharing site will soon IPO on U.S. stock exchanges.

The move has been delayed for several months for unspecified reasons even as rival site, Youku.com (NYSE:YOKU) enjoyed a spectacular IPO in December. YOKU shares have risen more than four times their IPO price of $12.80, and it will be interesting to see if investors greet Tudou shares with the same enthusiasm.

Traffic at the two online video sharing sites is nearly even. Alexa.com ranks Youku as the 10th-most-visited site in China, but Tudou’s not far behind in the No. 12 slot (as indicated by the red line below):

Source: Alexa.com

Still, there is no clear-cut winner in the market yet, and there probably won’t be anytime soon. The question is which company will differentiate itself first as China’s leading video site? Investors will get their chance to make their bets soon enough.

Tudou IPO: Key Facts and Figures

Profits? Not yet. Tudou lost $55 million last year, more than twice its loss in 2009. About a third of that loss was attributed to share-based compensation and “fees paid to third-party advertising agencies” (per the Wall Street Journal). Youku fared somewhat better with a 2010 net loss of $31.5 million. Throughout 2010, Tudou generated revenue of $43.3 million while Youku’s revenues were $59.6 million.

Ex-wife? That spat between Tudou CEO Gary Wang and his ex-wife could have serious implications for the company. Wang’s ex believes she’s entitled to half of his Tudou holdings. If that’s upheld in court, it could fundamentally shift the power structure for the company creating as much internal pressure as external pressure from rivals like Youku and Baidu’s (NASDAQ:BIDU) Qiyi.com. “Under PRC law and judicial practice, in principle, community property during marriage should be equally divided upon divorce, subject to any agreement reached by the divorced couple and other principles such as the impact on the continuous operation of the involved business,” Tudou writes in its recently-amended F1 filing.

The true “YouTube of China?” Youku relishes its nickname as the “YouTube of China,” but in fact both Tudou and Youku have diversified by offering pay-as-you-go, professionally produced content.

“Through building long-term partnerships with copyright holders and communicating with our media partners, Youku Premium is creating a whole new way for people to find and watch the content they want, when they want it,” Youku founder and CEO Victor Koo said in January.

Tudou has also branched out from user-generated video. Not only does the company license professionally-produced content for paying members, it also produces its own in-house premium content (including That Love Comes in November 2010 and last month’s debut of Utopia Office, which has been compared to the U.S. sci-fi show Fringe).

Still, user-generated content remains the heart and soul of the site with users uploading more than 40,000 video clips to Tudou last year. Total user registrations on the site climbed from 56.4 million in 2009 to 78.2 million by by the end of 2010.

Coming to a Chinese mobile near you. One of the brightest spots in Tudou’s business plan comes from a partnership with China Mobile – the PRC’s state-run mobile company that happens to operate the largest telecommunications network in the world. “We … began generating revenues in January 2010 from our mobile video services, which we provide primarily through a video channel with China Mobile, and we had an aggregate of approximately 15.8 million users with a total of approximately 27.7 million clip views in 2010,” Tudou writes.

China Mobile users can opt to pay a monthly subscription fee for the service. As the number of smartphones proliferates behind the Great Wall, expect mobile revenue to start contributing a lot more to Tudou’s bottom line. Still, it’s unclear how long it will take Tudou (or Youku for that matter) to start generating profits. In the meantime, a lot of investors seem to have their fingers crossed hoping for the best.



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5 reasons NOT to invest in the RenRen IPO

“The Facebook of China” is probably too tempting of a stock to pass up, but there are still warning signs that warrant acknowledgment before you invest in RenRen’s IPO.

Let me preface this by saying I’ve drank the RenRen Kool-Aid. How could any self-respecting geek turn down the opportunity to invest in the first major U.S. IPO for a social networking stock – especially one that’s being dubbed “the Facebook of China”? Still, there are warning signs that warrant being pointed out (even if you ultimately decide to ignore them in what will probably be a feeding frenzy on IPO day):

1) Competition. As it stands now, Facebook.com is blocked by the Chinese government. Rumors are running rampant that a partnership with Baidu.com, Inc. (NASDAQ:BIDU) – China’s largest search engine – is imminent, though. That could be bad news for RenRen. Who needs a Facebook clone, after all, when you can get the real thing? That said, I’m still not sure Facebook’s willing to turn information on its users over to the Chinese government – particularly if those users end up “disappearing” a few days later. Even if Facebook does decide to move ahead, it won’t happen overnight.

2) How many users do we have? One of the more puzzling pieces of the RenRen IPO is trying to figure out how many people use the site. RenRen itself can’t seem to spit out an accurate number. On April 15, the company claimed monthly uniques grew 29 percent (up 7 million users) during Q1 2011, per the Daily Times. Then, on April 27, RenRen back-tracked saying that monthly uniques were actually up just 19 percent (or 5 million users) during Q1. Weird…

All told, RenRen claims to have 117 million activated users as of March 31, 2011. Sources outside the company including Beijing’s Analysys International had previously reported the site has as many as 160 million registered users. I guess estimates will have to suffice.

3) Accounting abnormalities. “Prior to this offering, we have been a private company with limited accounting personnel and other resources for addressing our internal control over financial reporting,” RenRen writes in its F-1 filing with the SEC. An independent review of the company’s accounting procedures turned up “one material weakness and one significant deficiency.” Namely, the company has “insufficient accounting personnel with appropriate U.S. GAAP knowledge,” no stated plan for investing cash surpluses, and poor management of “treasury functions.” That makes RenRen the sort of company that embezzlers and fraudsters love. And fraudsters aren’t in short supply in China (take, for example, the recent news that the CEO of China’s Puda Coal secretly sold the company and forgot to mention that fact to shareholders).

4) PengYou. Ultimately, RenRen’s biggest competitor might not be Facebook, but rather a homegrown rival in PengYou.com. Two weeks ago, analysts at Goldman Sachs went on the record proclaiming PengYou will “become the dominant social network in China by leveraging (Tencent’s) much larger QQ community and more developed platforms.” Although PengYou launched just five months ago, it’s already the 26th most-visited site in China (check out my post RenRen IPO’s biggest hurdle might be PengYou for more).

5) What are ethics? When RenRen first launched in 2005 as XiaoNei.com, the company labeled itself a “Mark Zuckerberg production.” Zuckerberg, the CEO of Facebook, had nothing to do with the site, of course, but that didn’t really matter to RenRen’s founders. They just made a copy of Facebook and pushed it live. RenRen has something of a reputation for stealing ideas. When Kaixin001.com launched a social networking site in China, RenRen copied it (all the way down to the color scheme) and launched the doppelganger on Kaixin.com. Kaixin001.com eventually won a lawsuit against RenRen, but you can still type in Kaixin.com and get re-directed to RenRen.com. Maybe nice guys do finish last, after all.



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Yandex IPO: 5 reasons to invest in Yandex stock

Here are five reasons you should consider buying stock in the Yandex IPO; Russia’s largest search engine and the 23rd most-visited Web site in the world.

Yandex Stock Symbol: YNDX
Yandex IPO date: May 24, 2011

After several delays dating back to 2006, Russia’s largest search engine, Yandex.ru, has officially filed for an IPO with SEC. Yandex is currently the most-visited Web site in Russia and the 23rd most-visited Web site in the world (per Alexa). Here are five reasons you should consider buying stock in the Yandex IPO:

1) Dominating Google. There are, in essence, just two major markets that Google’s been unable to crack: China and Russia. Google.ru has made significant strides in recent years, but Yandex.ru still accounted for 64 percent of all the search traffic in Russia last year. Adding $1 billion to the company’s warchest via an IPO should help Yandex maintain it’s lead over the pesky folks in Mountain View, Calif. Yandex generates 1.6 times more pageviews than Google in Russia, according to the following chart from Alexa:

2) Lots of rubles. Yandex’s revenue is on pace to grow 22 percent this year from $439 million to $548 million, and that was good for $134 million in net income last year. Inexplicably, income was down in Q1 2011 to $28.8 million (a number that would give Yandex net income of just $115 million in 2011). Expenses appear to have spiked this year, presumably as the search engine faces increasing competition domestically and abroad. Still, Yandex is the undisputed online advertising leader in Russia, and it generates more revenue than any other Web property in the country, according to the company’s F-1 filing.

3) More servers, more data, more speed. Yandex will use the proceeds (likely $1 billion or more) from its IPO to invest in new servers and data centers. That should significantly boost the site’s speed and cement its place as the country’s leading search engine.

4) Explosive Internet growth in Russia. Russia’s internet market significantly lags development in the U.S. That puts the country’s internet market in the fat part of its growth curve. As of 2010, just 60 million Russians had access to the Internet. That’s roughly 43 percent of the country’s population. A chart from Yandex shows how quickly Russia’s Internet user base is expanding (via SiberianLight):

5) Investors love search engine stocks. Pure play search engine stocks are something of a rarity. Outside of Yandex.ru, there are really only two others we can look to for comparison: Google Inc. (NASDAQ:GOOG) and China’s largest search engine, Baidu.com, Inc. (NASDAQ:BIDU). Since its IPO in 2004, Google’s shares are up nearly 400 percent (although they still trade below highs set in 2007). Baidu’s up more than 1100 percent since debuting on the NASDAQ in 2005. So long as Yandex can retain its leadership slot in Russian search, history should repeat itself again and give us a winning stock.



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RenRen IPO’s biggest hurdle might be PengYou

As RenRen’s IPO date approaches, the so-called “Facebook of China” may face stiff competition from Baidu.com, Inc. (NASDAQ:BIDU), Facebook and Tencent Holdings Ltd. (HKG:0700).

With RenRen’s IPO date looming on May 4, investors are salivating over the first major social networking site to hit American stock exchanges. The so-called “Facebook of China” may face stiff competition in the months to come, though, as both Baidu.com, Inc. (NASDAQ:BIDU) and Tencent Holdings Ltd. (HKG:0700) have moved to aggressively ramp up their social marketing efforts in China.

China’s largest search engine, Baidu.com, is well-known among investors. Shares in the company debuted on the Nasdaq in 2005, and they’ve risen more than 1140 percent since. Earlier this month, Facebook announced rumors surfaced that Facebook struck a deal with Baidu to launch a new social networking site in the country (per MSNBC). No launch date has been announced (if it does indeed come to pass), but the companies will reportedly work together to build a new social networking site from scratch, as Facebook.com remains blocked by the Chinese government.

A partnership makes perfect sense. Baidu currently owns 73 percent of the search market in China but has struggled to succeed in the social networking space. The site’s reach should help it heavily promote a new social networking venture much the way Google has done with its Chrome Web browser. Facebook benefits from Baidu’s close working relationship with the Chinese government – something its needed to get past the Great Firewall.

Time is of the essence, though, and Tencent already has a head start on Baidu. Tencent operates the world’s largest online community with its wildly popular instant messaging platform, Tencent QQ. QQ claims more than 636 million active users. To put that in perspective, that’s more than twice the population of the U.S.

Tencent’s earliest foray into social networking started in 2009 with the launch of XiaoYou, a Facebook-like platform targeted at students. XiaoYou allowed users to create profiles based on nicknames (rather than real names) much like MySpace.com. We saw how well MySpace played out here, and Tencent must have taken notice.

The company scrapped XiaoYou last summer in favor of a new “real-name” social networking site dubbed PengYou (per TechRice). When PengYou launched public beta testing in September, invites were extended to employees at publicly-listed Chinese companies, including Fortune 500 companies in China, TechRice writes. By December, the site fully opened up to the public, and an Open API was released so that developers could write custom software for PengYou.

The site allows users to sync up with their QQ accounts and their SINA Weibo microblogging accounts (think the “Twitter of China”). Investors like those ideas. Late last week, analysts at Goldman Sachs actually downgraded SINA Corporation (NASDAQ: SINA) from Neutral to Sell citing a belief that SINA’s Weibo won’t be able to compete with full-scale social networks like PengYou.

“In our new analysis, we believe the most likely outcome is for Weibo to become an alternative loosely-engaged social network weighted toward its distinctive social media elements, and for Tencent Pengyou to become the dominant social network in China by leveraging its much larger QQ community and more developed platforms,” Goldman writes.

Since its launch in December (just five months ago), PengYou has grown rapidly. The social network’s currently ranked by Alexa.com as the 26th most-visited site in China. That puts it in striking distance of RenRen.com, which is ranked as the 15th most-visited site in China. It’s clear we’re witnessing the start of what promises to be a dogfight over social networkers in China. Tencent, Facebook and Baidu have entered the race late, but the finish line is a long way over the horizon.



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Facebook + Baidu vs. Renren: Let the war begin (BIDU)

Facebook’s partnership with Baidu (BIDU) will finally smuggle the social networking site behind the Great Firewall; a place where few other foreign social networks are able to tread.

The ante’s been upped in China’s social networking wars. Facebook plans to partner with China’s largest search engine Baidu.com, Inc. (NASDAQ:BIDU) to build a social networking site from the ground up. The move would smuggle Facebook behind the Great Firewall – a place where few other foreign social networks are able to tread.

Shares in BIDU rose nearly 5 percent in pre-market trading on the news although it could be a while before Facebook.cn becomes a reality. “If there is a deal, it must still make it over some imposing regulatory hurdles in China, and it will attract some attention from Capitol Hill,” writes Gady Epstein at Forbes.

Epstein’s optimistic the deal will ultimately work, though, as Zuckerberg appears “fully committed to make the kinds of concessions to do business in China that did not come so easily for Google.”

China’s social networking market is particularly brutal. Renren.com claims 160 million active users in the PRC, and it got its start as a Facebook clone. It was such a perfect clone that it matched Facebook’s DNA down to the chromosome – going so far as calling itself “A Mark Zuckerberg Production” on its homepage in the early days.

Everything that Facebook does, Renren does, too. The site launched in 2005, and spread virally across college campuses in China before eventually opening up to the public (just as Facebook did one year earlier). It recently launched Renren Places, a “Like” button and a Groupon-style deal-of-the-day feature. In many ways, then, Facebook’s biggest competitor in China will be itself, as it will need to find a way to differentiate itself from Renren.

That won’t be easy. Although Renren closely mirrors Facebook’s functionality, the site’s also started launching its own innovations from streaming music services to paid brand pages which operate like mini-sites on Renren.com. Some reports indicate Renren is charging as much as $90,000 for its customizable brand pages.

Renren could also generate a huge warchest when it moves ahead with a planned IPO. The company appears to be diversifying in the run-up to that IPO, too. Just last week, I wrote about Renren’s launch of a LinkedIn/Quora clone dubbed Jingwei.

Clearly, Zuckerberg has his work cut out for him. But a high-profile partnership with Baidu should give Facebook plenty of marketing clout and – just as importantly – a decent working relationship with China’s ruling elite. Both are requirements if Facebook hopes to challenge Renren.



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3 reasons to buy Baidu stock (BIDU) even at record levels

Baidu’s (BIDU) hard at work redefining itself not just as a search engine company, but as a full-fledged Internet conglomerate. That could lead to brand new revenue streams that might justify the company’s valuation.

Late last week, Chinese search engine company Baidu.com Inc. (NASDAQ:BIDU) overtook Web conglomerate Tencent Holdings Ltd. (HKG:0700) as China’s largest Internet company. Baidu’s market value surged to $46.06 billion compared to Tencent’s $44.6 billion, according to Business China. A lot of investors may be questioning just how big Baidu can get, but there are still compelling reasons to consider adding the stock to your portfolio. Here are three of them:

1) A monopoly on search. After Google Inc. (NASDAQ:GOOG) pulled out of China last March, Baidu’s share of the Chinese search market has steadily risen to 83.6 percent (per ResonanceChina). That’s led to a big bulge in Baidu’s wallet. During Q4 of 2010, Baidu’s revenue was up 94 percent year-on-year to RMB 2.45 billion with most of that cash coming from online advertising services.

2) A new way to browse. Baidu looks to be aggressively expanding its offerings. Now that it dominates search in China, the company’s announced that it’s hard at work on a Web browser that will compete head-to-head with Google Chrome and Microsoft Corporation’s (NASDAQ:MSFT) Internet Explorer. Baidu should be able to leverage its high-visibility search results pages as a platform to advertise the browser and encourage surfers to download it; much like Google did with its Chrome browser. A browser that’s optimized for the Chinese language and surfing habits could make consumers more comfortable (or even dependent) on Baidu’s services.

3) Mobile OS. Rumors surfaced last week that Baidu’s also working on its own “light operating system” for mobile devices to be launched in three to five years. It’ll be interesting to see if Baidu opts for an open-source OS that would compete directly with Google’s Android OS, or if they elect for a closed OS along the lines of Apple’s (NASDAQ:AAPL) iOS, which runs the iPhone and iPod Touch. Either approach could open up valuable revenue streams for Baidu in the mobile app realm.



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JPMorgan tries to get in before Twitter IPO (JPM)

Wealthy investors will pay just about anything to invest in Facebook and Twitter. JPMorgan (JPM) and Goldman Sachs (GS) are finding ways to make it happen.

Shortly after Goldman Sachs Group, Inc. (NYSE:GS) announced it was selling $1 billion in Facebook shares to its foreign clients, news leaked that JPMorgan Chase & Co. (NYSE:JPM) was raising cash, too, for its so-called J.P. Morgan Digital Growth Fund LP. A few weeks later, the Digital Growth Fund is sitting on a treasure chest filled with $1.2 billion. And it’s looking to deploy that cash for stakes in late-stage, pre-IPO social media companies.

Twitter sits in the crosshairs. Negotiations are ongoing, but it sounds like JPM’s pushing for a minority stake in Twitter, which could value the site at $4.5 billion, according to the Financial Times.

Talk about a steep valuation. Debra Williamson of eMarketer estimates Twitter could generate just $150 million in revenue in 2011, according to the Wall Street Journal. Compare that to Facebook, which could generate as much as $4 billion.

With a valuation around 100 times the company’s revenues, JPM will probably lobby for Twitter to put itself up for sale. A partnership with a site like Google Inc. (NASDAQ:GOOG) could give Twitter the cash and time it needs to roll out a viable, long-term business model. And no one suggests such a thing will be easy.

While Twitter’s got 175 million “registered accounts,” eMarketer believes that only 16 million or so of those accounts are actually active. Still, it’s difficult to put a price-tag on a site that’s among the Top 10 most-visited Web sites in the world (per Alexa). It shares that honor with Web superpowers like Baidu.com, Youtube.com and Google.com.

Twitter’s reach makes it difficult to slap a pricetag on, even if the site’s “only” generating $150 million a year. The fact of the matter is, investors probably won’t care. The hottest companies in the tech sphere are all privately-owned. And we all want a piece of something the rest of the public can’t touch. Wealthy investors will pay just about anything for that honor, and JPMorgan and Goldman Sachs are finding ways to make it happen.



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