On Wednesday Chinese online video/TV site Youku.com (NYSE: YOKU) went public after pricing its shares at $12.80, up from the original range of $9-$11. On its first day of trading, the company ended the day with a market cap of approximately $3.3 billion on a share price of $33.44. Yesterday, (12/9/10) it tacked on an additional $9.26 per share to close the day with a share price of $42.70 and a market capitalization north of $4.2 billion. Guests on CNBC must have talked about Youku 100 times this week adding to the stock's storied rise and hype. The question is -- Do people even know what they are buying? A close examination of their financials raises serious questions about the valuation of this stock in my opinion.
To start, I seriously doubt that most retail investors who have been piling into this stock know that Youku lost $25 million for the first 9 months of 2010 on revenue of just $35 million. That’s right, so far this year, Yokou has been generating less than $4 million a month in revenue while at the same time losing around $2.7 million a month. It is also worth pointing out that losses at Youku have actually been growing year over year, not diminishing. For the first 9 months of 2009 Youku lost around $20.4 million. For the first 9 months of 2010 Youku lost $25 million. These aren't exactly the type of numbers you usually see in a company with a market cap of say $400 million, let alone one with a valuation of $4.25 billion.
To cut to the point, my guess is that this stock will drop considerably as this data becomes more accessible to the general public. From what I see, Youku hasn't even proven their business model to be viable as the combination of high bandwidth costs, high content costs, and young users with small incomes all add up to losses for the company so far. I suppose this proves that investors still don’t read SEC filings. I’m sure someone in the mass media will eventually pick up on this and report it broadly to the market. When this happens, watch out below.
So you can see this hard data for yourself, here are some excerpts from the Youku Registration Filing filed with the SEC on Dec 3rd, 2010.
1) This part shows Youku having $35 mil in revenue in the first 9 months of 2010. Remember, they are a $4.25 bil company doing less than $4 mil a month in revenue.
As is customary in the advertising industry in China, we offer commissions to third-party advertising agencies that purchase our advertising services and recognize revenues net of these commissions. Our net revenues increased from RMB1.8 million in 2007 to RMB33.0 million in 2008 and to RMB153.6 million in 2009, and increased from RMB99.8 million in the nine months ended September 30, 2009 to RMB234.6 million (US$35.1 million) in the nine months ended September 30, 2010.
2) This part of their filing shows Youku losing $25 mil in the first 9 months of 2010.
We incurred net losses in the amount of RMB89.7 million, RMB204.5 million, RMB182.3 million and RMB167.0 million (US$25.0 million) in 2007, 2008, 2009 and the nine months ended September 30, 2010, respectively, primarily due to significant bandwidth and content costs, and capital expenditures required to ramp up our business and operations at the early stage of development of our business.
3) This shows that losses are growing, not coming down like you would want to see.
Our net losses increased from RMB136.3 million in the nine months ended September 30, 2009 to RMB167.0 million (US$25.0 million) in the nine months ended September 30, 2010 primarily due to the increases in our sales and marketing efforts, content costs and bandwidth costs.
4) Costs to license content are skyrocketing for Youku.
A majority of our user traffic is attributable to professionally produced content. The market prices for professionally produced content, especially popular movies and television serial dramas, have increased significantly in China during the past few years. For example, according to our internal records, the average license fee for television serial drama has increased in 2009 by more than 200% as compared to 2008, and such fee has increased in 2010 to date by more than 100% as compared to 2009. The average license fee for movies has also increased in 2010 to date by more than 90% as compared to 2009. Due to the improving monetization perspective of online video advertising, online video websites are generating more revenues and are competing aggressively to license popular television serial dramas and movies, and the increasingly intense content bidding process has in turn led to increases in license fees of professionally produced content in general.
To add to the story, last night, Youku announced that the underwriters of its initial public offering exercised their over-allotment option to purchase an additional 2,377,155 American depositary shares ("ADSs") from Youku at the initial public offering price of US$12.80 per ADS, less the underwriting discount. I bet these guys are happy that the stock is already $30 over the price they are paying for these shares, giving them a paper profit of over $70 mil. Crowd favorite Goldman Sachs happens to be the lead underwriter on the deal. Surprise, Surprise.
In a few months, you have to wonder how investors will react when the company reports (my guess) around $15 mil in quarterly revenue and earnings come in at a loss of anywhere from $2 million to maybe a profit of say, $2 million? If they "blow out" earnings and make $2 million, that will give them a forward P/E of around a 500+ based on its current valuation. As far as I’m concerned, only misinformed dreamers are buying this stock at this price. I'd be very surprised if it doesn't sell off, giving people a much better entry point at some time in the future. People really need to put a filter on CNBC sometimes.
Disclosure: I am short YOKU.