Is This the Start of China's Tech Bounce?

Everything that seemed bubble-icious about China's investing boom was on display when Youku.com (Nasdaq: YOKU  ) went public six months ago. The country's most popular video-streaming website was growing quickly but was very unprofitable.

Youku soared the day it went public, sending euphoric waves through its niche. Rival Todou stepped up its plans to go public. Another rival, PPLive, received a $250 million investment from Softbank. Trading volume even perked up dramatically for the smaller Ku6 (Nasdaq: KUTV  ) .

Yes, Chinese stocks were partying like it was 1999 in Silicon Valley.

The bubble has popped for many of China's recent debutantes, but are these fallen darlings ready to bounce back the way that some -- though clearly not all -- Internet-bubble companies did closer to home several years ago?

Goldman Sachs seems to think so, at least when it comes to Youku. Analyst Catherine Leung is upgrading shares for Youku, from Neutral to Buy, with a juicy $55 price target.

Youku shares nearly hit $70 two months ago, but the site that many call China's YouTube -- though it's not as dominant, and probably a closer match to Hulu -- had fallen all the way down to $27 yesterday.

Leung doesn't believe that Youku will be profitless forever. She sees the company earning $0.10 a share next year and $0.54 a share come 2013. You don't often see price targets that are more than 100 times next next year's projected profitability, but we've seen how expanding margins work with some of China's most profitable tech darlings.

Lean digital overhead in these highly scalable models can be explosive, especially when paired up with China's kind tax rates. Leading search engine Baidu (Nasdaq: BIDU  ) and online-gaming giant NetEase.com (Nasdaq: NTES  ) pack trailing net profit margins of 45% and 43%, respectively. Don't even bother checking your portfolio to see whether your companies can milk that kind of profitability out of their revenue after taxes. They can't.

It still won't be a smooth path to the feast for Youku. Streaming costs will need to get cheaper, and advertisers will need to begin paying more. However, if Youku can begin clawing its way back, why not the other Chinese speedsters that don't need to wait until next year to be in the black?

The past two months have dealt Chinese growth stocks a swift correction that's been largely overdone. Youku may be an unlikely player to lead the bounce, but some company has to do it.  

Is it too soon to jump back into Youku and other Chinese stocks? Share your thoughts in the comments box below.

Motley Fool newsletter services have recommended buying shares of Baidu and NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is a fan of new stocks and has even recommended several fresh IPOs to Motley Fool Rule Breakers newsletter readers in the past. He owns no shares in any of the companies mentioned in this story. The Fool has a disclosure policy.


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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 June 17, 2011, at 10:07 AM, fun2bretired wrote:

    Now Goldman Sachs makes a statement. Some of the Chinese stocks have lost ground during the last few months.

    Perfect time to get into some.

  • Report this Comment On June 17, 2011, at 6:24 PM, bigbigbarry wrote:

    "Perfect time to get into some."

    Absolutely. Whenever you get a chance to buy some un-transparent companies w/ PEs of 50 that are falling like rocks, in the midst of serious fraud risk (Sino-Forest, Longtop, DGW, among others) and Big 4 audit failures left and right, you've got to pull the trigger.

    Go for it!

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