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Youku? Oh No!

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Shares of (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 (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.

Baidu is a Motley Fool Rule Breakers selection. Sina is a Motley Fool Stock Advisor pick. International is a Motley Fool Hidden Gems recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarrizis fond of Chinese growth stocks, but only the profitable ones. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2011, at 8:38 PM, ZHD wrote:

    Yoku's CEO was an IB guy.

  • Report this Comment On February 22, 2011, at 8:58 PM, itsassimpleas wrote:

    run run run away as fast as you can china live video streaming will never go hand n hand with making money

  • Report this Comment On February 23, 2011, at 2:53 AM, natellieho wrote:

    Why did the SP go up 20% last week?

  • Report this Comment On February 23, 2011, at 10:17 AM, SirLongalot wrote:

    Love how the underwriter Goldman Sachs, slaps a buy rating on this thing and a target price of $40 right before earnings season (and right after this dose of reality is posted).

    What that $40 price target is based upon, other than complete and utter fantasy is beyond me. Anyone that buys this is completely out of their mind. This stock is worth no more than $5 in the real world. What GS is doing is borderline criminal! How can you be an objective analyst when you did the deal and own most of the stock!

    Makes me wonder how amazing their unaudited earnings will be come the 28th of february...

    GS just has to prop this thing up for 180 days and then they can dump it right?

    If I were a smart investor I would get out NOW before this thing goes to near zero

  • Report this Comment On March 12, 2011, at 5:45 AM, benedekgb wrote:

    ha.ha.ha, from the board leader at youku. your article cost around 30% gains to all those that followed your advice:)

    fyi: youku may be a bubble, but so are many other companies. it will be bought up for around 1006 share before the bubble burst is one likely scenario imo.

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