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What: Shares of Chinese Internet TV company Youku Tudou (UNKNOWN:YOKU.DL) surged on Thursday after the company beat analyst estimates for revenue and provided strong guidance when it reported its first-quarter earnings. At 1 p.m. on Thursday, the ADR was up about 14.5%.
So what: Youku reported first-quarter non-GAAP revenue of RMB1.06 billion, or about $171 million at the current exchange rate. Revenue grew by 51.3% year-over-year, beating analyst estimates by RMB30 million.
The company posted a non-GAAP net loss of RMB481.8 million, or about $77.7 million, more than tripling the net loss from the same period in 2014. Youku missed analyst estimates for earnings, but the rapid revenue growth seemed to overshadow the growing losses. Youku guided for second-quarter revenue between $237 million and $245 million, above analyst estimates of $225.5 million.
Now what: While Youku is growing fast, the company's losses are exploding. Content costs rose to 59% of revenue during the first quarter, up from 46% of revenue during the same period in 2014. The company's free cash flow is also very negative thanks to the growing cost of content. During the first quarter, free cash flow was a loss of $109 million.
Despite these massive losses, rapid revenue growth was enough to push the stock higher. It's an extremely risky stock given the losses, though, and I'm happy to avoid it.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.