Dangdang, Youku Tudou Dress up in Black

Two of China's older Internet names, e-commerce firm Dangdang (DANG) and leading video sharing site Youku Tudou (NYSE: YOKU), are showing just how important profits have become for their investors, with shares of each posting big gains after reporting moves into the black after years of losses. In the case of Youku Tudou, the company didn't actually report a net profit, but said it moved into the profit column on an operating basis in last year's fourth quarter. Dangdang was more definitive, posting its first net profit since sinking into the red two years ago when competition in China's e-commerce sector first began heating up.

Investors were the most enthusiastic about Dangdang, whose shares soared a whopping 31% after it announced its return to profitability in last year's fourth quarter, ending a string of eight consecutive quarterly losses. Not coincidentally, the company's closing price also marked a two-year high, approaching levels last seen when it was still profitable in 2011.

The company posted solid numbers in general, with revenue rising 22% and gross margins jumping by a full 4 percentage points as effects of multiple corporate restructurings and a shift in business model finally bore fruit. It added that revenue growth should accelerate to about 30% in the current quarter. But investors were clearly fixated on the bottom line, which was decidedly black as the company reported a net profit of 21.7 million yuan, or about $3.6 million. That contrasts sharply with the year earlier, when the company reported a net loss of 122 million yuan.

Too conservative
Dangdang was one of the earliest companies in China's fast-growing B2C e-commerce space, but its relatively conservative stance led it to get overtaken in the last three years by more aggressive rivals like Alibaba and JD.com. While investors are clearly happy that the company is back in the black, I still have serious doubts about Dangdang's long-term viability as an independent company due to its relatively small share of just about 2% in the crowded market. The company has been the source of numerous tie-up rumors, including the latest that will see it announce a new alliance with Wal-Mart-controlled Yihaodian early next month. I do expect one of those tie-ups will ultimately end in a merger within the next year or two.

From Dangdang, let's move on to Youku Tudou, which is China's last remaining major video sharing site after nearly all of its major rivals were purchased by bigger Internet companies over the past year. Youku Tudou has never posted sustainable profits since first going public in late 2010, and it continued to post a net loss in the fourth quarter of 24.6 million yuan, or about $4.1 million. But the loss was 78% narrower than a year earlier, and the company reported an operating profit of $7.3 million versus a loss a year earlier -- in line with a previous forecast.

The revenue picture for Youku Tudou was less exciting, with the company forecasting a drop in revenue growth to 35% in the current quarter from 42% in last year's fourth quarter. Still, investors chose to focus on the upbeat swing to an operating profit, with Youku Tudou shares rising 7% in after-hours trade after the results came out, near a two-year high. I do suspect the company will finally post its first sustainable net profit sometime later this year, which could provide some upside to its stock; but like Dangdang, I do also question whether Youku Tudou can survive as an independent company over the longer term. Accordingly, I do expect it could see a similar to fate to global rival YouTube, which was purchased by Google in 2006.