Youku Still Up for Grabs

 | Aug 22, 2013 | 4:00 PM EDT  | Comments
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Online video provider Youku (YOKU) is a gem in the Chinese Internet space. But if investors are lucky, it will get taken out.

It delivered disappointing earnings a couple of weeks ago, erasing most of a run-up to $26 from $19. In the last couple of trading sessions, however, it's bounced back and is around $23 this afternoon.

Meanwhile, giants Baidu (BIDU) and Tencent are looking to mergers and acquisitions to grow their businesses. And once Alibaba Group goes public, probably this fall, it will have plenty of money to throw at companies.

Youku could participate in the rising tide of an Alibaba offering. Many small-cap Chinese Internet companies are available for purchase, like Jaiyuan (DATE), BitAuto (BITA) and Taomee (TAOM), but it's not clear that these smaller names will move the needle for big companies like Alibaba or Tencent the way Youku could. Baidu already has a strong online video presence, and Alibaba recently made a big investment in the space through acquisition.

There have been a number of acquisitions of unprofitable players in the online video space. But Youku has been a buyer, taking out its former competitor Tudou last year.

Youku has great management, its online video is popular and it's a great outlet for selling ads. It's available, and I believe it will be acquired in the next year. So it's a good name to own between now and its next earnings -- which might disappoint again.

In the meantime, people will bid it up, especially if Alibaba goes public in the next couple of months. And that will shine a spotlight on all Chinese Internet names.

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