Baidu-spurred tech slump raises bubble fears

By Sophie Taylor and Duncan Martell

SHANGHAI/SAN FRANCISCO (Reuters) - Technology stocks tumbled on Thursday as a sell-off in shares of Chinese Internet company Baidu.com (BIDU.O) fuelled concerns that the recent tech rally may be coming to an abrupt end.

The tech-heavy Nasdaq index .IXIC dropped 1.4 percent on the day, down 39.41 points, after a JPMorgan report spooked investors. Baidu slumped 10 percent to $308.78, while other high-flying stocks including Apple Inc (AAPL.O) and Blackberry maker Research In Motion (RIMM.O) also fell.

JPMorgan said it expected Baidu.com Inc to report third-quarter revenue in line with a Wall Street consensus, but slightly below the investment bank's own previous target.

Baidu fell a further 2 percent in after-hours trade.

MSCI's index of IT stocks in Asia Pacific, excluding Japan, .MIAPJIT00PUS was off 1.6 percent by 12:20 a.m. EDT on Friday, in line with a broader drop in Asian stock markets.

"You are seeing the classic bubble being burst in the best-performing momentum names such as Baidu.com, Apple and RIM," said Tim Biggam, lead options strategist at online brokerage thinkorswim in Chicago.

"Once these started falling, the selling begat selling as everyone headed for the exits at one time.

"This is a mini-version of what we saw at the height of the dot-com bubble in late 2000 and early 2001," Biggam said. "It will be interesting to see what happens on Friday."

In a note to clients, JP Morgan analyst Dick Wei projected Baidu revenue of about $65.7 million -- below his previous target of $67.9 million -- and said some smaller Web sites had shut down recently. Adjusted earnings per share would be in line with his previous forecast of 68 cents, he wrote, adding that any short-term drop in Baidu's stock price was a buying opportunity.

"Investors are willing to pay very high valuations for emerging market stocks, including China, but any negative news will trigger nervousness in the market," said an analyst at a major bank, though he disagreed that the Baidu slump was a repeat of the dot-com period.

"The high stock valuation is matched by strong earnings growth and positive cash flow, so it's really a different situation," he said.

Many technology stocks have rocketed this year, with Apple nearly doubling since January and Baidu trebling.

Valuations have steepened, with the Nasdaq 100 index trading at 25.2 times expected 2008 earnings on Wednesday, versus 22.3 at the start of the year.

Baidu trades at 133 times 2007 earnings, according to Reuters data, compared to a multiple of 41 for Google and Yahoo's (YHOO.O) 66.

RIM shares fell 5 percent to $111 on Nasdaq, but earlier dropped to a low of $105.02. Still, the stock has more than tripled in the last 12 months amid soaring demand for RIM's smartphones.