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In an unusual move for a Chinese start-up company, Internet TV provider Youku.com (YOKU) has landed two deals that may help it dominate the Chinese Internet TV market. The first deal is with Time Warner (TWX) that will allow the company to distribute 500 Warner Bros movies, including The Lord of Rigs and Harry Potter. The second deal is with DreamWorks (DWA) to distribute its two Kung Fu Panda movies (Wall Street Journal, 8/30/11).

Youkus stock has suffered a big correction, together with other momentum stocks. At around $23, it is trading near 20% below its end of July price. Do these deals and a low price make Yuku.com a buy?

Company*

Business

Recent Stock price

Percent correction from the end of July

Baidu, Inc. (BIDU)

Internet search engine

132

-20 (%)

Sina Corp. (SINA)

Media and mobile value-added services

91

-18

E-Commerce China Dangdang Inc. (DANG)

Business –to-Consumer e-Commerce

8

-40

Renren Inc. (RENN)

Social Networking

7.6

-23

Youku.com (YOKU)

Internet TV

$23

-25

Sohu.com Inc. (SOHU)

Brand advertising, on-line gaming

73

-17.50

Source: Yahoo.finance.com

We dont think so. The stock has an astronomical PE, and negative operating margins - the highest among Chinese momentum companies. Besides, the company has no barriers to keep the competition off its market, and it is at the mercy of government regulators that have the tendency to change the rules too often for entrepreneurial companies.

Company*

Business

Forward PE (Dec. 2012

Operating Margins

Baidu, Inc. (BIDU)

Internet search engine

30.88

52.18 (%)

Sina Corp. (SINA)

Media and mobile value-added services

51.54

22.30

E-Commerce China Dangdang Inc. (DANG)

Business –to-Consumer e-Commerce

121.57

0.32

Renren Inc. (RENN)

Social Networking

187.50

5.42

Youku (YOKU)

Internet TV

1,312

-20.41

Sohu.com Inc. (SOHU)

Brand advertising, on-line gaming

13.29

37.50

*These statistics should be interpreted with caution, as Chinese accounting standards are different than those of the U.S. - so they aren't comparable with those of their U.S. counterparts like Amazon.com (AMZN) and Google (GOOG).

Source: Why Investors Should Avoid Youku.com