Yesterday Youku.com (NYSE: YOKU) announced 3Q11 earnings. The company reported inline financial results. Revenue was $41.2 MM, 3% higher than street consensus. Net loss was $7.4MM, 95% wider than the consensus. Youku’s loss per share was $0.07, much lower than consensus.
For China Internet companies with high valuation, Youku particularly, an inline result means a disaster. Let us look at Youku’s earning history. Since its IPO at the end of 2010, Youku beat its guidance and street consensus easily every quarter. In 3Q11, however, Youku’s revenue was just 6% higher than its guidance. This indicates that Youku’s booming progress has peaked already. The market responded to Youku 3Q earnings by sending Youku's share price down 20% in morning trading. And stock price of Youku closed at $17.24, down 16%.
(Data Source: Company Data, Thomson ONE)
We believe there are two reasons why Youku's stock price plunge today. On one hand, U.S. investors gradually realized that China is no longer an untouched gold mine for Internet companies; on the other hand, it is the time that Youku’s high valuation returns to normal.
From the 3Q11 results, we see that Youku’s revenue growth rate is 140% Y/Y, which is lower than 192% in 2Q11 and 144% in 3Q10. This may be partially due to China’s slowing down economy. In bad economy, advertisers would rather save money and cut cost than spending more to generate extra revenue. China’s tightening credit policy leaves little room for major advertisers to raise fund for working capital. So cutting advertising expense is not a bad way to survive in this situation. Meanwhile, online video still represents a small portion of China’s advertising market. TV is still the first choice of advertisers, especially when they are short of cash.
Another way to look at Youku’s financial statement is to find out where they spent investor’s money. The following graph shows that when revenue grew 140% Y/Y in 3Q11, Youku spent more on bandwidth and copyright. Nowadays, China’ video copyright price is almost 10 times of the price one year ago, mainly due to the competitive bidding from top Chinese online video websites. Big players, Youku, Tudou (Nasdaq: TUDO), Qiyi (subsidiary of Baidu, Nasdaq:BIDU) for example, are trying to take more market share compared with 2 years ago by purchasing overpriced TV shows with their strong cash position. With few competitors on the table, big players hurt themselves by burning investors’ cash, which is an unsustainable strategy. We do not see Youku has a distinct advantage over other Chinese online video websites. With a cloudy future in China online video market, we recommend investors stand on the sideline for the next few months.
(Data Source: Company Data)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.