Chinese streaming video site Youku.com (YOKU) is slated to release third-quarter earnings Wednesday. With the poor showing of Chinese travel website Ctrip.com (CTRP) on Monday, some are wondering if it's a harbinger of things to come from Youku, but I see the two stories as unrelated.
Ctrip went into the doghouse for its light fourth-quarter guidance, suggesting that top-line revenues would only increase by 15% to 20% and operating profit would drop by 6%. This was far less than most observers expected, and the stock immediately got a 13% haircut.
The story at Ctrip is that its margins are under pressure as it goes after more market share. Having locked up most of the business traveler market, it is going after leisure travelers. This niche has lower margins. What makes it worse is that Ctrip is entering this market just as the Chinese government is tapping the brakes on growth and inflation is still being brought under control. Splurging for a vacation trip is not a top priority for many Chinese consumers right now.
For Youku, it's never been profitable and is much smaller in terms of revenue than Ctrip (about a quarter of Ctrip's revenues). Yet Youku investors are not buying it for profits today but for a chance at huge profits in the future. The allure of growth is what has driven this stock to nearly $70 in April. It's now trading just below $20, but still above last December's initial public offering price of $12.80 (unlike peer Dangdang (DANG)).
Analyst consensus is for Youku to announce a loss of $0.03 per share on $40 million in revenue for the quarter. I believe the company is likely to surpass its guidance on the top-line. This has been taken as a positive by the market in past quarters.
Youku is selling hopes and dreams - just like Tesla (TSLA) does with its electric sports car. Therefore, exceeding on the top-line fulfills those hopes. If Youku also guides above consensus for the next quarter, which currently calls for a loss of $0.02 per share on $48 million in revenue, that can also be seen as an enormous positive.
Finally, a positive influence on the stock could come if Victor Koo, Youku's CEO, discusses progress in bringing more Hollywood films as premium content to the service in the next year. Youku has had deals to show Inception and Kung Fu Panda 2 in China. Any new details on how Youku will offer more premium content to subscribers on a pay-per-view basis will be taken as a very constructive development.
The big question for Youku besides how quickly it will ramp up revenue and earnings is how quickly it will be able to slow down costs. For the past year, its content costs have risen faster than revenue. It's likely that this will still be the case in the current quarter. The company might even guide that it could continue through 2012.
Youku is the current market-share leader and it has been smart enough to raise a good amount of cash in a secondary offering to fortify its balance sheet against competitor Tudou (TUDO). The bigger risks to Youku's long-term success in acquiring premium content will be from bigger Chinese portals like Baidu (BIDU), Sina (SINA) and Sohu (SOHU).
