Shares of China's leading online video company opened higher today after posting better-than-expected results. Youku Tudou's (NYSE: YOKU) revenue clocked in at $140.2 million, just ahead of Wall Street's expectations and up 55% on a pro forma basis. The dot-com speedster still isn't profitable, but narrowing deficits -- and this time it was down to a $0.21 per ADS loss -- continue to point it in the right direction.
Youku Tudou's guidance could've been better. The 35% to 42% year-over-year growth that it's targeting for the current quarter is below the 45% pop analysts were eyeing. But if you wanted safe and perfect, you wouldn't be buying into a profitless Chinese Internet company. Then again, analysts see Youku Tudou finally turning the corner and becoming profitable next year, finally cashing in on the synergies behind last year's game-changing merger of Youku and Tudou.
Youku Tudou is in the right place. China's online migration and appetite for entertainment have translated into healthy top-line growth. There's also the global smartphone revolution, and that's not lost on Youku Tudou. It revealed that it's serving up an average of 300 million videos to mobile devices a day.
Market leadership is being contested now that Baidu (BIDU -2.47%) has become a major force after taking a majority stake in iQiyi last year and snapping up PPS this year. But Baidu may potentially be in hot water when it comes to video, as Youku Tudou is joining a group of companies alleging that the search giant's guilty of copyright violations. Youku Tudou wouldn't mind if Baidu got taken down a peg or two in video. It would make it that much easier to grow its already rapidly expanding roster of brand advertisers.
Youku Tudou isn't resting on its streaming video laurels. It's about to roll out a mobile game center. During its earnings call, Youku Tudou detailed its plans to launch an app marketplace later this year, followed by a mobile game publishing platform next year. When you're generating 300 million daily video views -- up from 100 million at the end of last year -- it's not a bad strategy to see what else you can pull in mobile. This has grown into a very competitive niche in recent years, but Youku Tudou clearly feels as if it has enough connections with consumers through video to begin working on other entertainment-related pursuits.
The key here is growth without losing sight of the profitability that Wall Street is expecting next year. Youku Tudou is on the right track, and it's why it's that rare stock that's moving higher despite offering lukewarm guidance this earnings season.
