Youku Is Slammed By Latest Earnings

 | May 23, 2014 | 11:00 AM EDT
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Youku (YOKU) is down 10% this morning after it reported earnings Thursday night which, while they beat on the bottom line, where a little light on revenues. Their guide on next quarter revenues were also slightly below at the top end of consensus for revenue.

The stock now trades at about $18/share. That's close to a 52-week low.

It's also surprising, given that, Alibaba and Jack Ma's private equity firm Yunfeng made a $1.22 billion investment in Youku at the end of April, valuing their investment at $30.50/share.

On the first day after that investment, when the stock had been trading in the low $20s (and down from its 52-week high of $36/share), it immediately jumped on the open but then seemed to go straight down from there.

If one was cynical, you'd think that someone knew bad news was coming.

Youku management talked up the value-add of the Alibaba partnership on Thursday night's earnings call. They mentioned that they would be relying on Alibaba's cloud infrastructure to help deliver their video content.

The biggest cost that Youku has to deal with every quarter are bandwidth costs. Perhaps Alibaba's existing infrastructure will help them to bring this down.

The additional capital will also help Youku look for strategic acquisitions.

At the moment, Youku is the top online video app in China. It's also third most popular app overall in China. The firm is now generating 30% of its revenues from mobile users.
It's clearly ahead of other online video players for brand, scale, and availability of online content.

The investment from Alibaba looks like a fabulous deal for Youku, given where the stock is now trading. They'll greatly enjoy the extra capital. 

The deal should work out fine for Alibaba in the long run, too. They have staked their claim on a strategically-important app in the Chinese internet ecosystem. Tencent or Baidu (BIDU) will not be able to steal it away from them.Alibaba has also invested strategically into other TV broadcasting and film assets. That additional content will now be able to find an online platform for distribution down the road.

So even though it appears that Alibaba overpaid in the short-term for Youku, there are many reasons to believe that it was strategically sound for Alibaba.

For regular Youku investors, it is hoped the disappointing guidance will be made up for in the back-half of the year. The synergies and costs savings from the Youku and Tudou merger a few years back have been slow in appearing even though the market share of the combined entities has been impressive. 

For Youku to see its stock spike, it either has to drastically cut its costs or find a way to boost revenue through subscription methods.

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