Youku Tudou Is No SINA or Baidu

China's leading video website operator is growing and its losses are narrowing, but that may not be enough.

Youku Tudou (NYSE: YOKU  ) opened sharply lower this morning after capping off a strong quarter with lukewarm guidance for the current period.

Things have been clicking since Youku completed its acquisition of smaller rival Tudou this summer. Revenue in the fourth quarter clocked in at a better-than-expected $102.1 million, or 30% more than what the two companies combined for a year earlier. Youku Tudou still has some more synergies to squeeze out of the deal but its quarterly deficit shrank to $0.11 a share.

Analysts were expecting red ink of roughly $0.15 a share on less than $100 million in revenue.

However, then Youku Tudou had the gall to publicly look ahead. The former dot-com darling is targeting $77 million to $83 million in revenue for this year's freshman quarter, and that's well off the $88 million that Wall Street was modeling.

Sequential slides are normal, and this is a seasonal thing. Youku itself saw its revenue decline 13% between the fourth quarter and the first quarter a year earlier. At the midpoint we're looking at a heartier 22% sequential drop this year, but Youku Tudou isn't alone. The late arrival of the Chinese New Year this year has left most of the country's leading Internet companies warning of substantial sequential dips.

SINA's (NASDAQ: SINA  ) guidance calls for a 13% sequential downtick in revenue this quarter, and that's given its recent moves to begin monetizing its red-hot SINA Weibo micro-blogging platform. Even the typically resilient Baidu (NASDAQ: BIDU  ) will be falling short. China's top search engine is targeting a 4% to 7% sequential dip on the top line this quarter.

The problem for Youku Tudou is that the revenue drop is more pronounced, and that's with every incentive to finally begin monetizing mobile usage this year.

There's no denying that the merger of Youku and Tudou is a good thing. The combined sites now command roughly a third of China's video streaming market. Cost savings will be realized. However, streaming video isn't an easy gig, especially in China where the more magnetic content is commercially licensed.

Youku Tudou spent 26% of last quarter's revenue on bandwidth costs in serving up the chunky video files and another 43% on content costs. We're talking about a model where the gross margins are already leaner than the chunky net margins that investors find in Baidu and online gaming giant NetEase.com.

Youku Tudou's margins will improve in time, but this will never be one of China's most profitable companies in terms of margins. Bandwidth costs may fall and marketers may be willing to spend more to reach viewers, but investors need to be realistic.

Youku Tudou is the star player of a growing online niche, but there's more to worry about than just this sharp sequential slip.

A smart mobile play
The mobile revolution is still in its infancy, but with so many different companies it can be daunting to know how to profit in the space. Fortunately, The Motley Fool has released a free report on mobile named "The Next Trillion-Dollar Revolution" that tells you how. The report describes why this seismic shift will dwarf any other technology revolution seen before it and also names the company at the forefront of the trend. You can access this report today by clicking here -- it's free.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2288474, ~/Articles/ArticleHandler.aspx, 10/30/2014 10:44:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement