Is Tudou Holdings the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Tudou Holdings (Nasdaq: TUDO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Tudou Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 196.8%* Pass
  1-Year Revenue Growth > 12% 78.9% Pass
Margins Gross Margin > 35% 16.5% Fail
  Net Margin > 15% (99.8%) Fail
Balance Sheet Debt to Equity < 50% 6.9% Pass
  Current Ratio > 1.3 2.72 Pass
Opportunities Return on Equity > 15% (68.4%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes. *Four-year growth.

With four points, Tudou Holdings gets only a mediocre reception from investors. The Chinese online video company has seen amazing growth, but unfortunately, it hasn't found any way to make money from it.

Ever since its IPO last year, some investors have been critical of Tudou. Although the video-streaming company has some similarities to Google's (Nasdaq: GOOG  ) YouTube in that it relies largely on user-uploaded content, the Chinese market is much different. For instance, in China, Sohu.com (Nasdaq: SOHU  ) runs an online video channel that has seen huge jumps in both sales and advertising.

Perhaps because of that, early rumors that Baidu (Nasdaq: BIDU  ) might buy out Tudou came to nothing last summer, sending shares plummeting shortly after its IPO. Since then, Tudou has released mixed results at best, as rising costs have overwhelmed sales growth to push the company further away from profitability.

That's why yesterday's announcement that fellow video provider Youku.com (Nasdaq: YOKU  ) would acquire Tudou at a huge premium was such a surprise. With neither company in great shape, the combination only has the virtue of giving Tudou shareholders an easy way out.

Unless the deal gets killed, we'll never get to find out if Tudou could become a perfect stock. But with Google and Sohu as credible, profitable competitors, it seems unlikely that even a Youku/Tudou combination will hold up in the long run.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Click here to add Tudou Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Baidu, Sohu.com, and Google. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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