Toto, I’ve got a feeling we’re not in 1999 anymore.
In a move that would have been unheard of back in the heyday of the Internet bubble, two underwriters of Baidu.com’s
red-hot IPO came out and said the stock has come too far too fast.
In a sign that research and investment banking may finally have become disjoined, Goldman Sachs and Piper Jaffray, two underwriters of Baidu’s August IPO, initiated coverage of the company with “underperform” ratings. The firms said their ratings were a reflection of Baidu’s “off the chart” valuation rather than any fundamental problem with the Chinese Internet search leader’s business.
Back in the roaring 1990s, it was a given that the underwriting firm would initiate coverage of a new issue with a “buy” rating as soon as the quiet period had passed. Stocks would run up in anticipation of the inevitable buy rating. The alleged conflict of interest — investment banking deals in exchange for favorable stock ratings — launched the career of crusading New York State Attorney General Eliot Spitzer and led to a host of settlements by investment banks.
Baidu.com’s stock ran up 36% in two days on buyout rumors and anticipation of the end of the quiet period. When Goldman Sachs and Piper Jaffray came out with their lower-than-expected ratings Wednesday morning, Baidu’s stock tumbled 28.4%, giving up all of the run-up and a couple points more. Even at today’s close of $81.32, the stock is still valued some 44% more than the analysts feel it’s worth.
Today’s moves by Goldman and Piper don’t erase all the excesses of the late 1990s, but it’s a sign that Wall Street research is at least moving in the right direction.
Baidu’s plunge wasn’t the only bad news for the market Wednesday, as stocks took a beating on weak retail sales and rising oil prices. Consumer inflation data will be released Thursday morning.
The Nasdaq tumbled 22 to 2149, the S&P fell 4 to 1227, and the Dow lost 52 to 10,544. Volume declined to 1.98 billion shares on the NYSE, and 1.74 billion on the Nasdaq. Decliners led 20-12 on the NYSE, and 20-9 on the Nasdaq. Downside volume was 59% on the NYSE, and 70% on the Nasdaq. New highs-new lows were 85-42 on the NYSE, and 83-37 on the Nasdaq.