'China's YouTube' or Just Too Hyped?

by: Chimin Sang

Warren Buffett put it right: You should not need a scale to tell that a 300-pound person is overweight - you should simply see that at first sight. (NYSE:YOKU), a Chinese “YouTube” company, which IPOed at $12.8 per ADS (American Deposit Shares - each ADS equals 18 shares) in December, went as high as $50 on its third trading session and is still currently trading at $38, fits Buffett’s description perfectly. is just like the 300lb person, insanely valued at the current price. Its overvaluation is so apparent that shorts should be greatly rewarded in the near future.

I meant to write about Youku since its IPO, but Shane Farley has done a wonderful job (here and here) and mentioned most points that I wanted to say. They are:

  • For a company that made $35m in revenue and lost $25m for the first 3 quarters of 2010, a $4b market cap looks horrendously expensive.
  • Youku has Tudou and Ku6 as pure direct competitors and Baidu (NASDAQ:BIDU), Sina (NASDAQ:SINA) and Sohu (NASDAQ:SOHU) as conglomerate direct competitors.
  • Tudou, which is going to be public in 2011, operates even better than Youku.

With the correct ADS count in mind, we can now properly compare it with its peers. In the following table (Click to enlarge), I compare it against three groups. We pay special attention to Price over Sales, where I assign sales equals two times the revenue of the last two quarters.

Click to enlarge

The first group is its direct pure competitors, including and These two companies, together with, share exactly the same business model, the “YouTube” model. came to the market through asset swap with Hurray!, a failed wireless value-add service company, under the wings of Shanda Interactive. is yet to come to IPO this year.

The second group is three Chinese media/search companies: Sina, Sohu and Baidu. Each of them has its core business drawing revenue mainly from advertising and each of them has substantial presence in the online video business. Sohu is not a pure media company as it owns Changyou, a game company. The Sohu data presented in the table is the media portion of the business.

The third group is high flying momentum stocks. I picked Netflix (NASDAQ:NFLX), Opentable (NASDAQ:OPEN) and (NYSE:CRM). All of them have appreciated so much that they attracted significant short interest from reputable hedge fund managers. Whitney Tilson is short NFLX and OPEN.

Let’s first look at its comparison with the second group. Sina is unarguably the most influential news portal in China, which saw its stock price getting a big lift due to its successful execution in Weibo, or mini blog. While Yoku is only 1/10th of Sina’s revenue and still loses money, it is now valued at par with Sina. Sohu’s media business is five times as big as Youku revenue wise and yet its market cap is only one third of that of Youku, which amounts to a 15x difference. Baidu, with a de facto monopoly position in the search market, enjoys P/S of 25, way below Youku’s 81, who has a much weaker market position than Baidu.

The third group shows the same story. Each in the group has a dominant position in its respective market, and yet the highest P/S is only 19 for Opentable, way below Youku’s 87. We can also see that Youku has a vastly different model from Netflix, which has a healthy low P/S at 4.

Now I would like to strike home why P/S here is important and how absurd Youku’s price is. If we assume that Youku can double its revenue every year and it will eventually have a similar cost structure as Sina, it will take three years for it to come down to the current valuation level of Sina. If you think Sina is already expensive today, then Youku is super expensive.

Lastly let us look at its stock within its own group., though admittedly having a worse cost structure, has a P/S of 13, which is expensive in my opinion for such a money losing company. Yet when compared with Youku, it is much cheaper in valuation. has filed its initial F-1 filings, which showed nearly identical revenue numbers for the last two quarters but with much better profit numbers. The current Youku valuation will put its price at the minimum $60 per share. If this pricing takes place, it will be a mind-boggling event. The top two online video companies in China, while losing money, claim higher market cap than the top two news portal companies, Sina and Sohu, each with much higher revenue, profit and very strong presence in the online video business.

Disclosure: I am short YOKU.