Youku.com (NYSE:YOKU) is sometimes referred to as "the YouTube of China." It describes itself as "China's leading Internet television company. Our Internet television platform enables users to search, view and share high-quality video content quickly and easily across multiple devices. Youku, which stands for "what's best and what's cool" in Chinese, is the most recognized online video brand in China."
In other words it's a China social media internet company with a lot of revenue growth with thin margins, huge losses, and a head-scratching ridiculously high market cap that shows no sign that the upcoming earnings report will be any less of a disaster than the rest have been.
(1) In its Q2 earnings release, YOKU described the climate during the quarter as "challenging macroeconomic conditions" and "We are seeing softening signals in macroeconomic conditions which affect the overall sentiment for advertising in China" -- in fact, things appear to have gone from bad to worse, as others in the space,who are better capitalized and more successful than YOKU, have been predicting slowing advertising revenues for China internet companies. This bodes terribly for the already struggling YOKU.
(2) During Q3, YOKU announced the completion of a merger with Tudou Holdings Limited. The problems? This is going to create all sorts of charges in the near-term especially in Q3 followed by all sorts of integration-related expenses. All of that, however, might have been easy to swallow if Tudou wasn't also a big low-margin, big money loser as was evident in its Q2 earnings release.
(3) Some say YOKU is the "YouTube of China" -- if that's the case, that sounds more dreadful than hopeful to me for holders of the stock. YOKU's current market cap is over $2 billion. YouTube was acquired by Google (NASDAQ:GOOG) for only $1.65 billion and that was during much better economic times! To put in perspective, the "Google of China" Baidu (NASDAQ:BIDU) trades for 1/6th that of Google. Speaking of BIDU, they own iQiyi which is one of many competitors to YOKU. Unlike the United States, China doesn't have a single dominate video site like the United States has with YouTube.com.
(4) A majority of the free trading float is still owned by institutions.
Any weakness in the report could spark a sell off as these guys have been slowly throwing in the towel for 2 years as it is. At some point one must figure enough is enough. How much longer can they hold onto a China internet stock with such dim financial results and outlook yet trades at such a lofty market cap?
(5) Following competitor SINA corporation (NASDAQ:SINA) Q3 results, shares plunged hard on weak outlook and analyst slashed price targets bad. For example, Piper Jaffray cut their target by $25 per share from $90 to $65 on SINA. Something similar could easily happen with YOKU.
Buyer beware. The next couple of earnings reports look dire for YOKU beginning with the Q3 report due after hours on Thursday. And don't even get me started on the negative signal that often comes with Thursday after hours earnings reports (last report was on a Monday).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.