Youku.com YOKU S
December 28, 2010 - 4:02pm EST by
heffer504
2010 2011
Price: 36.00 EPS $0.00 $0.00
Shares Out. (in M): 113 P/E nm nm
Market Cap (in $M): 4,100 P/FCF nm nm
Net Debt (in $M): -250 EBIT 0 0
TEV ($): 3,900 TEV/EBIT nm nm
Borrow Cost: NA

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Description

  

I will now advocate the epitome of the anti-momentum short trade, a little Chinese company called youku.com (YOKU).  Yes, you have heard of it. 

No, I'm not crazy.  To start, here are some snippets:

 

 

BIDU: Baidu, China's own internet giant had announced its own Video channel website just two months back. Keeping all the censorship rules in mind,

they planned to stream ad-supported video content, tapping the 162 million yuan ($23.73 million) worth of China's online video market. The site is
called Qiyi. The direct competition for Qiyi would be China's most famous video sites like Youku, Tudou, Sohu Video and 56.com. Providence Equity
Partners [a Hulu Investor] will invest $50 million into Baidu's video company called Qiyi. Baidu will continue to maintain majority ownership in the company.

 

 

SOHU: Online video, our potential future revenue driver, is achieving significant traction as we add high-definition content and leverage the synergies of

the Sohu platform to make our video products even more attractive to both users and advertisers.

 

Now, let me walk you through each of our businesses. On the portal side, we continue to believe online video is one of the fastest growing segments,

 where Sohu has secured a leading position. According to the latest iResearch report, ad revenue for the online video industry in China are expected to
grow 73% in 2010 and over 65% this year from 2011 to

2013, reaching RMB11 billion in 2013.

 

According to Class IV and iResearch, for the quarter just completed, Sohu ranked third in terms of total number of online video views and the total

effective time spent watching videos in China. Our share of the time spent watching video online has also been increasing.

 

 

SINA: Our total rich media and video advertising is getting closer to like 18 to 19% of revenues, and video advertising in particular is growing more

than 100% year over year...  In China, I think media advertising really taking off. So we are beefing up our effort in terms of increasing our video
inventory and buying more content for video and next year, we intend to increase our content investment in the video sector more aggressively so
 that we can take advantage of this trend of video advertising growth in China.

 

 

So, what is the "youtube" of China worth?  Well, considering there are lots and lots of "youtubes" in China, not that much.  But, 60 times run-rate

revenues with an incredible amount of cash burn?  That seems excessive.  Google paid $1.65 billion for youtube, a dominant franchise in a bigger
economy, with an existing business platform to accelerate monetization.  And they overpaid!

 

I am actually short YOKU against SOHU and SINA.  Basically, YOKU has an enterprise value of almost $4 billion, with $17m of revenues last quarter. 

 SINA has an enterprise value of $3.5 billion, with $19m of video/rich media revenues last quarter.  SOHU has an enterprise value of $1.9 billion and
is "third in terms of total number of online video views".  I see no reason that YOKU will outcompete SOHU or SINA, yet you are being paid to take
the non-video, profitable, businesses by putting on this pair trade.

 

As a side note, I am short Netflix and believe it is worth a lot less than the current price.  Yet, I think it is easily worth more than twice YOKU! 

 At $9.5 billion enterprise value, it seems like a bargain in comparison...
 
YOKU should be a $5 stock at best, in my opinion. 

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