Last week, Youku.com (NYSE: YOKU) went public with a ton of fanfare. All the big financial media outlets couldn’t stop talking about Youku, calling it the “YouTube of China” over and over again. Towards the end of the week, Youku investors got a bucket of cold water poured on their head as Wall Street actually started paying attention to Youku’s terrible financials and their ridiculous market cap, which pushed through $4.5 billion dollars on Friday morning before the stock sold off hard. Herb Greenberg from CNBC should be credited for being the first financial television reporter to actually look under the hood of Youku. He warned investors several times on Friday about the stock's valuation, puny revenues, and big (and growing) losses.
Today I want to take a look at what I think will further take the air out of the YOKU bubble. You see, the other “YouTube of China”, Tudou.com (TUDO) is set to go public at any time on the Nasdaq, and Tudou actually has better financials that Youku. Don’t get me wrong, both companies are terrible investments, in my opinion, however Tudou appears to be the better bad investment. Tudou was actually first to file their IPO papers with the SEC, but Youku got their IPO off first. Tudou could literally go public any day now.
Lets take a look at the numbers:
Youku lost $25 million dollars for the first 9 months of 2010 on revenue of $35.1 million. Youku’s losses are actually accelerating year over year as they were just $20.1 million for the first 9 months of 2009. Great job Youku!
Tudou, on the other hand, reported a loss of $12.5 million dollars for the first 9 months of 2010 on revenue of $33.6 million. Additionally, Tudou’s losses year over year are actually declining. For the first 9 months of 2009, Tudou lost just under $15 million.
So, as you can see, they are neck and neck as far as generating revenues goes, however Tudou is simply a better run business with significantly smaller losses. For more information, feel free to take a look at Tudou’s registration statement.
Tudou seems to be heading in the right direction towards profitability while Youku is headed the wrong way. I expect that Tudou management will really be highlighting their better financial performance vs. Youku’s numbers when they do go public. When this happens, I’d expect a good number of Youku investors to abandon ship and buy Tudou stock….if they really feel compelled to own shares of a money losing video site in China.
I also want to point out that these firms are not even the first video sites in China to go public in the USA. Ku6 Media (KUTV) runs the popular Ku6.com video site in China. Believe it or not, people also call Ku6.com the “YouTube of China”. Ku6 also has terrible financials. Ku6 lost $12.7 million in Q3 on just $4 million in revenue.
Further more, there is an additional “YouTube of China” that users have access to invest in. It’s this little search engine company called Baidu. Baidu is the majority owner of Qiyi.com which was launched in early 2010 to take on the Youkus and Tudous of the world.
That’s got to be it, right? There can’t be anymore “YouTubes of China” traded in America, can there? Well, actually, Sina (SINA) and Sohu (SOHU) are both Nasdaq companies with huge online video businesses in China. Both of these companies make over $100 million a year in profits and have the ability to outbid the little Youkus and Toudus for professional produced content. For example, Sina just signed an exclusive deal with the NBA. They will be showing NBA games almost daily throughout the season. This is likely a deal that Youku and Tudou couldn’t afford.
So, as you can see, there are actually three pure play “YouTubes of China” that investors will have access to invest in through the Nasdaq or NYSE soon plus at least three other indirect players who are competing hard in the online video space and are cash rich (Baidu (BIDU), Sina and Sohu) .
That’s got to be it though right? There can’t possibly be any more “YouTube’s of China”? Wrong! There are actually dozens. You see, when an internet business model succeeds in the USA it gets copied over and over again in China. Some of the other “YouTubes of China” include 56.com, ouou.com, joy.cn, xunlei.com, 6.cn, Pomoho.com, ChinaOnTV.com, qyule.com, ys321.com, ppstream.com, bbsee.com, winvod.com plus dozens of others.
I want to touch on one other thing that puzzles me about Youku. The corporate structure outlined in their SEC registration statement looks very odd to me. On Friday, Tim Hanson from the Motley Fool pointed out that YOKU shareholders don’t even actually own the operating businesses in China. From what I can tell, the YOKU IPO was for a Cayman Islands holding company that owns a Hong Kong based holding company that has contractual rights to the economic interests in the Youku business. The owner of the actual operating business in China, including the Youku.com website and video operations, appears to be the wife of Youku’s CEO Victor Koo and their CFO. The wife owns 80% of the operating business and the CFO of Youku owns the remaining 20%.
The registration statement goes on to state that the wife has no management position with the holding company that YOKU shareholders own. Additionally, they say they set it up this way because the Chinese government strictly prohibits the foreign ownership of companies that provide value-added telecommunication services in China. They go on to say that they think the contracts have everything covered to ensure that YOKU shareholders get treated fairly. However, they also go on to say that
We cannot assure you, however, that we will be able to enforce these contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.
I strongly encourage all investors to take a very close look at the corporate structure. I am not an attorney that specializes in setting up holding companies in multiple countries, so please draw your own conclusion. Pay attention to page 63-68 in their registration statement. Also, take a good look through the 35 pages of risks that the company outlines for investors. Page 28 has a good section about potential Youku accounting problems. Have fun reading this!