Another Falling Knife; Youku (YOKU) Getting Killed

By: ispeculatornew
Date posted: 11.18.2011 (5:00 am) | Write a Comment  (0 Comments)

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We have reviewed several “falling knives” or stocks that seem to be in free fall. There was Research in Motion (RIMM), British Petroleum (BP) and more recently Netflix (NFLX). Today, I’d like to discuss (YOKU), a Chinese stock that I added to my list of stocks I follow. What is Youku? The best way to put it is that it’s a Chinese Youtube. One big difference of course being that Youtube is owned by Google (GOOG) which helps a great deal in many different ways. Youku is more on its own in China facing competition from Baidu (BIDU), China’s king of the web, among others.

In theory, it’s an easy sell; the leading player in video in the biggest internet market. How could that not turn out to be an incredibly growth story?

The China Factor

I’ve written extensively about my belief in the Chinese internet sector, especially over the long to very long term. That being said, I think I’ve explained very clearly why it was important to pick industry leaders when going into Chinese markets. Baidu (BIDU) has clearly been that and while Youku is a leader in its sector, it’s unclear to me that they will not end up on top. If you look at how things shaped up in the US, I am not convinced that an independent Youtube would have remained on top. The costs both in terms of bandwith and content do become quite important and while Google has never really broken down how profitable Youtube has been or currently is, I think most analysts would agree that it was at best flat for a long time.

How is a more independent Youku doing in the face of strong competition in China?

Youku’s Growth

In an exploding Chinese internet market, we would certainly expect growth to still be well into the triple digits both in terms of unique visitors and revenues. It’s true that the focus in not necessarily on revenues or profits for now but I would still expect that revenues growth remain very high.

Look at the revenues from the past 8 quarters:

The year over year growth from the past 4 quarters:

Valuation of Youku (YOKU)

Personally, I think it would be nearly impossible to compare valuations based on earnings mostly because YOKU is losing money. A good comparison point would be with Linked (LNKD) based off of revenues. Take a look at the multiple you are paying to buy shares of YOKU:

Personally, it’s a no brainer for me and I would prefer owning shares of LinkedIn (LNKD) than Yokuu (YOKU) at current valuations. That could change but for now, it’s my opinion. That being said, as I mentionned on Twitter a few days ago, as much as I love LinkedIn (LNKD), the stock is just too expensive for me right now. Hopefully that will change.

Do you have any thoughts on YOKU?

Disclosure: No positions on these stocks

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