This morning's news that Alibaba was investing in Sina's (SINA) Weibo service (their version of Twitter) caught many people off guard. It shouldn't have.
Sina's Weibo service is still massively popular with over 200 million users. It had been outshone lately, however, by Tencent's WeChat growth, which recently got to 300 million users after being at zero a little over a couple of years ago. What this meant is that either Sina's portal business was being undervalued with Sina's stock at $3.3 billion or Sina's Weibo service had virtually lost all its value. Alibaba apparently thought so because they just bought an 18% stake in Weibo, valuing it at $3.3 billion. Because of the apparent disconnect in pricing by Wall Street, Sina's shares are up this morning by 15%.
Are there other Chinese Internet stocks like Sina that have been languishing but are really interesting jewels waiting to be discovered somehow? The one that jumps out to me is Youku Tudou (YOKU).
Youku is China's leading premium video service. It's sort of a combination of Hulu, HBO Go, and YouTube all in one. They make most of their money on ads before, during and after premium video. They're just barely break even. However, they are the market share leader in China -- by a wide margin -- after merging with the number two player Tudou last year.
Youku's stock price has languished for much of the last two years and has been forgotten about by many investors. That lack of a move in the stock price masks some of the changes that have been going on behind the scenes at Youku. Beyond the merger with Tudou, there have been several small online video competitors in China which have closed because of higher ongoing costs. That increases the market share and profits for Youku.
Is online video a valuable space? Yes .Are the bigger players like Alibaba, Tencent or Baidu (BIDU) going to want to be in this space or partner with Youku in some way? I think the answer is yes.
The number two player in the online video market is now Baidu's Qiyi service. I think it's just a matter of time before Alibaba or Tencent want to make a play for this space too -- especially since they're both so determined on vying for dominance in the total Chinese Internet space.
I think you want to have a position in Youku. It's already bounced off a recent low of around $16 back to $19. As we move towards the summer, I expect it to go back to around $24 on some improved cost-rationalized earnings.
But, the day they get bought or make some kind of strategic investment, Youku should fly up.