Tuesday, June 14, 2011

Is Youku Destined to Drop Further?

$2.8 billion market capitalization Youku (NYSE: YOKU) is China's version of Google's (NASDAQ: GOOG) YouTube. For some unknown reason, the SEC allowed Youku to sell American Depository Shares (ADS) -- each of which "represents 18 Class A ordinary shares" with a third the level of voting control as the Class B shares -- to U.S. investors. And since the beginning of 2011, those ADSs have lost 23% of their value. The so-called lock-up period, that keeps insiders from selling, has expired. And this may mean that insiders are dumping shares. Do they have further to fall?

Youku describes itself as "an Internet television company in People‚Äôs Republic of China."  It generates revenues by selling advertising to companies seeking to reach viewers of its 2,200 movie titles, 1,250 television serial drama titles and "231,000 hours of other professionally produced content, including 194 variety shows." Those viewers include 203 million monthly visitors from homes and offices and 61 million monthly visitors from Internet cafes.

And Youku has a unique corporate structure. It's a holding company based in the Cayman Islands but headquartered in Beijing. That holding company owns Youku, that changed its name from iVerge Internet in Nov. 2005, and Brilliant Jet, an advertising agency. This structure makes it hard for U.S. entities to sue, it does not pay income taxes to Chinese or Cayman Islands authorities, and is not subject to U.S. taxes (although there's a risk it could be).

Last week, the lock up period on Youku's ADSs expired -- making 19.6 million ADSs available from insiders, which will add to its 30 million ADS float.  Despite that increase in supply and a plunging price, the company sold 12.31 million ADS at $48.18 per ADS in late May.

Is there any link between Youko's ability to sell ADSs and its financial performance?

An examination of its form 20-F, it looks like a 10K, reveals a company that's growing and losing lots of money. That's because the cost of the bandwidth to stream its videos and the cost of licensing that content -- a cost that grew at over 200% in 2009 and over 100% in 2010 -- eats up all its advertising revenues (they grew 364% in 2009 and 151% in 2010. And Youku's capital expenditures further siphon cash out of the company.

Based on this, it's not clear whether investors can rely on its financial reports. But a look at those reveals that without its ability to sell stock -- led by Goldman Sachs (GS) -- it would be burning through cash fast. That's because it reported $59 million in sales and a $31 million net loss. Without the $217 million in proceeds from its IPO, this company would be gasping for cash.

I am not sure whether anyone who bought these ADSs actually read Youku's financial filings. But it looks like this company's stock is floating on thick cloud of hype.


Post a Comment

<< Home