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).

Not well Tudou
Online video is booming in China. It's just not profitable.

Tudou posted mixed quarterly results last night. Revenue soared 70% to $26.5 million, fueled by a 60% pop in online advertising and a 183% surge in its nascent mobile video service.

The good news pretty much ends right there. Delve deeper into the income statement and it doesn't get pretty, as revenue costs soared 119% during the period. Bandwidth, content, and mobile video service costs all more than doubled. The Internet is supposed to arm companies with the ability to create a scalable model, but that's just not going to happen if overhead is outpacing top-line growth.

The result isn't pretty. Tudou's adjusted loss widened substantially to $22.3 million -- or roughly $0.79 per ADS. It's certainly not a good sign when a company's net loss is almost as big a sum as its revenue.

It isn't easy to make money as a video-sharing site given the chunky bandwidth costs, and it's even harder to make things work in China, where advertisers are still hesitant to shell out serious money to reach the clip-culture masses.

Tudou's report doesn't bode well for niche leader Youku.com (NYSE: YOKU) when it reports in two weeks. Both companies are still losing gobs of money. Analysts don't see Youku posting an annual profit until next year, and they don't see Tudou fading to black until 2014.

Tudou has had a rough life since going public last summer at $29, going on to shed nearly half of its value.

There are a few things going for Tudou. Internal data shows 300 million monthly unique visitors consuming 5.2 billion monthly videos. If and when China in general and Tudou in particular evolve to the point of monetizing that traffic profitably, Tudou will be a worthwhile investment.

However, investing in China is risky enough already. It's smarter to stick to the companies that are generating positive earnings or at least very close to being profitable.

I've seen enough. I'm initiating a bearish CAPScall rating on Tudou this morning.

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.

  • Sohu.com (Nasdaq: SOHU): Investors who insist on some skin in online video in China may want to take a closer look at Sohu instead. Video is a small but fast-growing part of the popular online portal that has more lucrative interests in online gaming and search. The key difference between Tudou and Sohu is that the latter is routinely profitable as a business.
  • SINA (Nasdaq: SINA): Another profitable portal with a closer tie to Tudou is SINA. The Chinese dot-com darling behind the fast-growing Weibo website acquired a small stake in Tudou last summer. The deal is paying off, as Tudou now lets Weibo visitors share videos using their Weibo usernames. The result is that 41% of the videos on Weibo are now hailing from Tudou. Yes, this makes Tudou a great coattail play on the success of "the Twitter of China," but it's better to bank on the profitable coat-wearer instead.
  • Google (Nasdaq: GOOG): Big G may be a distant second in China as a search engine, but it's the global leader when it comes to video-sharing through YouTube. Google doesn't break out the financials of its subsidiaries, but advertisers are clearly flocking to YouTube. Again, Google as a company is insanely profitable. I also figured that I would include a portfolio replacement that wasn't based out of China.

In the end, it's much Tudou about nothing.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Sohu.com, Google, and SINA. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.