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. 

Catalyst

gravity
competition
secondary/unlock
    sort by    

    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. 

    Catalyst

    gravity
    competition
    secondary/unlock

    Messages


    SubjectThoughts on recent news?
    Entry01/06/2011 03:40 PM
    Membermm202
    The stock has run hard the last couple of days, seeminglyat least partly on what strikes me as a very fluffy PR
    Just curious to know your thoughts on it.
    Thanks for all of the great ideas lately, btw. highly appreciated.
    MM

    SubjectRE: Thoughts on recent news?
    Entry01/07/2011 10:27 AM
    Memberheffer504
    seems like should be insignificant, i agree...

    Subjectto clarify
    Entry01/28/2011 09:45 AM
    Memberheffer504
    yoku is still a good short, but the pair has closed- sohu up 17%, sina up 19%, yoku down 17%

    SubjectScreaming short but needs a catalyst
    Entry04/14/2011 10:45 AM
    Membercasper719

    I keep thinking x short is the epitome of insanity in this cycle and then another one makes a stronger case. Heffer or anyone else, what could be a catalyst for rationality here besides the lockup in a month? It seems we've had a mind boggling 100% short squeeze off a ridiculous Goldman buy rating which has been surpassed by 50% now. I don't know if there is another company in the market, let alone with a multi billion market cap, trading at almost 100x revenue with negative gross margins and a business model that is on tenuous grounds of being able to ever turn a meaningful profit.


    SubjectScreaming short but needs a catalyst
    Entry04/15/2011 08:42 AM
    Memberheffer504
    so, the original trade- long sina/sohu and short yoku- hasn't been all that bad.  at this point though i agree, yoku is a screaming (stand-alone) short, with no catalyst.  also, it seems as though the share unlock does not really break the stocks, though it may slow it down...

    SubjectRE: Screaming short but needs a catalyst
    Entry09/21/2011 11:13 AM
    Memberspecialk992
    Well, this has turned out to be a great call, the hard part is figuring out when to cover it. This could very well be a zero long term, but who's to say they couldn't double it on some hype from here. How do you think about a floor value, given they have raised over $600M from investors?

    SubjectFor those seeking some more NFLX Juice
    Entry10/26/2011 12:19 AM
    Membercasper719
    I think its pretty clear that this is a near zero to anyone with half a head. I'm not going to bother talking about fundamentals or valuation as they dont exist except to clarify this was never the youtube of China; it is the NETFLIX of China. Yoku is the epitome of a chinese legit but illusionary company. In April this thing was ~100x and 4x the IPO, now it is only up 60% from the IPO and maybe it's ~20x revenues and I believe they had a fractional gross profit since the lockup. Incredibly YOKU even after the NFLX meltdown today has almost a 2.5 billion market cap.
     
    I have been in and out of YOKU for the last few months, but I was reminded of it today, when reading the Goldman blurb on NFLX which they cut the PT to 75. The disparity in regards to YOKU at Goldman right now is even more laughable then before; and these are the guys who has been moving this stock back and forth since masterly taking it public and getting the secondary done. In their definitive report, Goldman went out of their way to compare YOKU on valuation to NFLX, claiming things like how NFLX was a market leader and spending a whole paragraph hyping how positive dynamics in America were for NFLX.
     
    Specifically and incredibly, Yoku with all its wonders deserved to be 10 billion market cap over 5-8 years for a 16-27% IRR because "Netflix is already a 12 billion market cap stock". EOM with a pretty chart of NFLX on its way to the moon....
     
    With no Netflix equivalent promise land, and the news flow just continuing to get worse for Chinese listed stocks and China as a whole, I believe there are very few risks on the inevitable road to this finally becoming a busted IPO on its way to oblivion. In fact the shockingly quick TUDO bust is more evidence that the only thing probably keeping YOKU at 20 (at 5x the value of TUDO) is the trading range bias creating by its one day return on the IPO and subsequent treacherous short squeeze (which thankfully I saw the other side of).
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