Throw This Stock Away

The house rules are simple in this weekly column.

• I bash a stock that I think is heading lower.
• I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Tudou (Nasdaq: TUDO  ) .

Much Tudou about nothing
One of China's largest video-streaming websites went public today.

Why?

Didn't it learn from Youku.com (Nasdaq: YOKU  ) ? China's most successful video website nearly hit $70 four months ago, but has gone on to surrender nearly two-thirds of its value.

Investor appetite has waned for Chinese dot-com debutantes, especially the profitless ones that are light on revenue. If anything, it's actually a miracle that Tudou was able to pull this deal off by going public at $29 -- the midpoint of its earlier targeted range.

Youku and Tudou are different. Youku relies largely on licensing professional content for its site. Tudou leans on user uploads. In stateside terms, Youku is Hulu and Tudou is YouTube.

Well, that's not exactly fair because Tudou doesn't have the dominating market share that YouTube has through most of the globe. Most of China's biggest Internet companies have also been breaking into the video-streaming market. In its latest quarter, Sohu.com's (Nasdaq: SOHU  ) online video channel saw a 150% pop in revenues with a nearly 50% increase in advertisers.

And quite frankly, it's not as if Tudou has been very good at monetizing its traffic.

Tudou has 90.1 million registered users and attracts 200 million unique monthly visitors. An average of 47,000 videos are uploaded daily! However, Tudou checked in with revenue of only $17.8 million in its latest quarter. Youku, on the other hand, checked in with $30.6 million on the top line during the same three months.

Thankfully, Tudou doesn't have Youku's ridiculous market cap. There are 113.4 million ordinary shares of Tudou out there. Since every American depositary share trading here is the equivalent of four ordinary shares, Tudou went public with a valuation of $822 million. Youku, with the equivalent of 109.3 million ADS outstanding, commands a whopping $2.6 billion market cap.

I would avoid both, quite frankly. Youku is now trying to sell premium downloads, and it claims that it's on the path to profitability, but I'll believe it when I see it.

If it's hard enough for stateside companies to turn a profit by serving up chunky video files in a free ad-supported model, who knows how long it will take for the crowding Chinese market to break through? 

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

• NetEase.com (Nasdaq: NTES  ) : One of the half-dozen competitors singled out by Tudou in its SEC filing is NetEase. As China's leader in online gaming, few investors may realize that NetEase also runs a thriving portal. Video is now in its arsenal. Unlike Youku or Tudou, NetEase isn't on the path to profitability: It got there years ago. NetEase trades at a reasonable 14 times this year's projected earnings, and that's with analysts looking for revenue and earnings to climb 26% and 32%, respectively.
• Bitauto (NYSE: BITA  ) : Tudou spent most of its first trading day below its $29 IPO price. It didn't take long for Tudou to officially become a busted IPO. There are plenty of Chinese dot-coms that have tanked since going public over the past year, but Bitauto deserves better. The online marketer posted strong results last week. Revenue soared 42% to $24 million, and its adjusted profit from continuing operations soared 151% to $4.2 million. Despite its chunky profitability and posting greater revenue than Tudou, Bitauto's market cap is just a third of what Tudou is presently commanding. Please.  
• Google: Why buy a company that may potentially be the YouTube of China when you can buy the parent company of YouTube itself? The world's leading search engine -- and top dog in online advertising -- is a lot cheaper than you think. Big G is now fetching just 15 times this year's projected earnings and 13 times next year's profit target.

I'm sorry, Tudou. You're good, but you're not that good!

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