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Why Youku Tudou Inc Tumbled Today

By Brian D. Pacampara, CFA – Feb 19, 2014 at 2:46PM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Youku Tudou (NYSE: YOKU) sank 3.5% today after Maxim Group downgraded the Chinese Internet television company from Hold to Sell.

So what: Along with the downgrade, analyst Echo He planted a price target of $24 on the stock, representing about 25% worth of downside to yesterday's close. While growth investors might be attracted to Youku's operating momentum over the past year, He thinks that an increasingly intense competitive environment will likely pressure ad revenue and margins going forward.

Now what: According to Maxim, Youku's risk/reward trade-off is rather poor at the moment. "Recently, Baidu's (BIDU -3.75%) video operator iQiyi purchased 2014 exclusive rights of five top-rated shows from Hunan satellite TV. Tencent Video purchased 2014 exclusive rights of Voice of China, and Sohu (SOHU -1.96%) Video also purchased 2014 exclusive rights of several top-rated long-form TV dramas," noted He. "In comparison, YOKU's content pipeline appears less competitive, especially on exclusive rights. ... YOKU may face near-term difficulties to attract more ad dollars from competitors and/or maintain a premium pricing as it has been able to in the past." When you couple those headwinds with Youku's lofty price-to-sales of 12, it's easy to agree with Maxim's bear stance.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Baidu and The Motley Fool owns shares of Baidu. 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.

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