Shares of Youku.com (NYSE: YOKU ) traded as much as 8% lower this morning -- following Friday's 4% dip -- after an analyst scoffed at the company's valuation last week.
China's leading video-streaming website made a scorching IPO two months ago. The stock went public at $12.80 in early December, and was trading as high as $50 by its third day on the market.
It's all been downhill from there. Apparently, investors rushed into the stock without checking up on the company's grim financials.
This company isn't simply losing a lot of money. Youku also sports negative gross margins! The $35.1 million in revenue that it generated through the first nine months of 2010 isn't even enough to offset its $37.2 million cost of revenue.
The first public investors were wowed by its 200 million unique monthly visitors, without reflecting on the costs necessary to maintain Youku's 5,500 servers and the challenges of monetizing bandwidth-heavy video streams via low-paying video ads.
Maxim Group's Echo He initiated coverage of China's leading video-streaming website with a "sell" rating on Friday. It's about time! He sees losses continuing until 2013, and even his price target of $22 implies a fat earnings multiple of 100 times the earnings he projects in 2013. In short, he's being generous.
Youku gained momentum when it was billed as China's YouTube, but it doesn't the same kind of lead on its competition. Fierce rival Todou filed to go public late last year. PPLive -- which uses cheaper yet more unreliable peer-to-peer delivery -- just raised $250 million from Asian juggernaut Softbank. There's also the much smaller Ku6 (Nasdaq: KUTV ) , valued at a sliver of Youku's gargantuan market cap.
There is certainly money to be made from China's dot-com darlings. From Baidu (Nasdaq: BIDU ) in search to Ctrip.com (Nasdaq: CTRP ) in travel to even SouFun (Nasdaq: SFUN ) in real estate listings, the world's most populous nation has offered no shortage of winning IPOs. However, all three of the aforementioned companies were very profitable when they went public. Youku is toiling away in a niche that is years away from turning the corner. Monetizing stateside video sites is hard enough. Who knows how long it will take for China's streaming sites to post profits?
By the time profitability is an option, how confident can investors be that Youku will be leading the pack? Beyond Todou or PPLive, giant dot-com portals Baidu and SINA (Nasdaq: SINA ) are also dabbling in this space now, and they have the profitability and rich balance sheets to make stronger runs at Youku once its niche is fiscally attractive. How confident are you that China's historically restrictive government will make it easier -- not harder -- to operate a streaming site for the masses?
Youku could be a great company someday. But for now, neither the time nor the price is right.
What do you think of the market potential of online video in China? Share your thoughts in the comment box below.