|Shares Out. (in M):||193||P/E||0||0|
|Market Cap (in $M):||2,509||P/FCF||0||0|
|Net Debt (in $M):||-1,261||EBIT||0||0|
I am sorry for the delay. Youku’s stock was trading below 13 when I wrote up this piece. The stock price is higher today but it is still a compelling investment .
Youku Tudou Inc (Yoku) is the Chinese version of Youtube and Netflix hybrid. It derives 90% of its revenue from online advertising services and 10% from its subscription business. Youku.com is the Tudou.com is ranked The two sites have a combined 35% market share. It is a result of merger between Youku.com (No.1 online video platform in China, ranked by total viewing time and unique visits) and Tudou.com (the 3rd most popular platform and 5th by total viewing time due to its higher percentage of user generated contents on the site.) Tudou.com went online on April 15th.2005, even earlier than Youtube did. It encourage users to produce creative and interesting content. Among the early Chinese netizens, it enjoys a cult like statutes. Some early active users got so famous that eventually became professionals. Youku.com was founded by Victor Koo, a former Bain Consultant, Vice president of VC Richina Group. It started as a copycat of youtube.com. You can tell easily by the name as well as the website design. It invested heavily in technology and infrastructure to provide the best user experience, which helped youku to gain the largest number of users and became the biggest online video platform.
Why the stock is cheap
The stock traded from the 35 dollars in the early 2014 down to the 13 dollar level today. The major reason is that Youku has taken a more aggressive content strategy to gain traffic share, which dampens its near term profitability. Its GM went from 22.3% to less than 19% and will remain under pressure in the near term. Just like Netflix started to invest to produce its own content in 2012, when the GM fell from 36% to 27 and stock fell as low as 50 dollars from 300. Youku is at early stage of developing its own content ecosystem, which will help to drive mobile pre-installation, brand awareness and user loyalty. The proprietary content allows Youku to differentiate from its competition. The in-house content currently accounts for about 10% of total. In addition Yoku is spending aggressively to license professionally produced content. . It signed exclusive contract with JSTV on “The Brain II”, which achieved 20M vies in the first 24hours after the debut.As a result, Yoku’s Netflix like subscription based business is growing rapidly. In the 4Q 2014, it has 1M paying subs (up from 800K in 3Q) and generated 70M in revenue, representing 649% year-on-year growth and 67% sequential growth from the third quarter.
I think the market under estimated Youku’s competitive advantage.
Bandwith cost in China is about 4 times higher than it is in the US and it is a significant cost of revenue for the industry. Telecom carriers use a tiered pricing model. Being the larges player, Youku consumes about ¼ of entire bandwidth consumption. This allows Youku to enjoy lowers incremental bandwith cost compared to its compeptitors. It spends 23% of revenue in 2013 down from 29% in 2012.
Youku also differentiate itself with the best network quality. It has invested heavily in network infrastructure. 60% of Youku's crew is specialized networking engineers, including user experience (UE) engineers and user interface (UI) engineers. Youku has more than 40 database server nodes in China, including all the tier 1 cities and most of the tier2/tier3 cities. Youku also build a monitoring system with telecom carriers that can precisely count and analyze each node's Internet volume.
Youku’s best in class network infrastructure also gives it the best position to carry out multi-device strategy and a leading position in the transition from PC to smart phone Mobile advertising contributed over 35% of advertising revenues in the fourth quarter, as compared to 10% at the beginning of 2014. It is ranked No.1 in monthly unique visitors, user time spent, and startup sessions.
Its independence of other large internet company
The other two major competitors in the online video industry are own by Baidu and Tecent. Youku’s independent status makes it a preferred partner. It partnered with Xiaomi, the leading smart phone marker, and Alibaba, the largest internet commerce company, to help build its content ecosystem. Both partnerships give Youku significant edge over its competition. Xiaomi helps Yoku to strengthen its leadership in mobile installation. Alibaba has the largest database of Chinese consumers. The corporation between the two companies can provide ad buyers more measurable brand ad solution. Alibaba also gives youku unique the access to small merchants, which help it to grow non-brand advertising through its real-time bidding demand side advertising platform.
Youtube, the No.1 online video platform, is projected to make 3.5 Billion (up from 2.8 in 2014) in 2015 and valued at 40 Billion more than 11times sales. LeTV, forth player in the online video industry in China, with has 12billion EV. Youku generated 650M in revenue and is only valued at 1.5Billion at current price, only 1/8 of the value of the 4th largest player. Although LeTV trades in China and does not represent a reasonable valuation matrix, it provides a nice hedge for Youku. I personally like the pair trade to hedge the macro risk if you are also bearish on China as I am.
I expect Youku to generate more than 900M in revenue in 2015 growing at a similar a Youtube. Both companies are not profitable currently. Arguments can be made both sides on whether Youku should be valued at the discount to Youtube. Even with 5 times revenue (less than half of that of Youtube), Youku’s share could be in the low 30s. It is more than double from the current share price.
1, Alibaba might acquire Youku. Currently Alibaba owns 25% of Youku. It is also the only big 3 that does not own an online video platform. Alibaba launched its entertainment strategy. It has a movie studio, also entered into set-top box business. Youku is a perfect fit for Alibaba, as it seeks vertical intergration.
2, Youku can be taken private by its management. There is a huge valuation arbitrage for the Chinese internet company in the US market and domestic market. Youku is a much bigger and better company than LeTV. Youku can go private and then re-list itself in China. Given Victor Koo’s VC background, it is not unimaginable.
|Subject||Re: Author Exit Recommendation|
|Entry||04/16/2015 10:11 AM|
closed out my position today around 17.45. 35% + gain in a week with no foundamental changes of the company.
I might go higher from here. It just went up too much too fast .
|Entry||07/09/2015 11:46 AM|
Absolutely! Leshi is a great short. It is not just the valuation. Their business model is questionable. There are a lot of accounting issues (rev recognition for example.) I did not write this up because it is difficult now, even for a domestic investor to short.