Youku.com (YOKU) trades to intraday lows as cautious China Economic Review [CER] article circulates. According to China’s premier business analysis magazine, Youku.com, a co. that operates as a Chinese Internet video Website, is going bankrupt.[From CER]: “Foreign investors are clearly very excited about China internet plays. In the case of Youku, dubbed – inaccurately – the “Chinese YouTube,” they have made a sizeable investment in the wrong direction. Youku, YouTube, Ku6 (KUTV) and Tudou have yet to prove a profitable revenue model for online video. Even if they do, it will never exhibit the same growth characteristics of pure dot-com plays like Google (GOOG), Facebook or even Baidu (BIDU).”
CER notes that while Youku.com is not a case of defrauding investors, the co.’s current valuation is based on unrealistic anticipations for profitability, and is thus unsustainable and cannot but erode.
In short, CER believes Youku is at present growing bankrupt. In the long run it may manage to survive, but it will never deliver the profit margins and growth investors seem to expect, because, says CER, it can’t. The sooner investors realize this, the sooner the ticker’s inflated valuation will pop.
Youku’s current profit and operating margin trailing twelve stand at (52.88%), (39.84%), respectively. In terms of management effectiveness: (7.37%) ROA, (18.68%) ROE. In late February, Maxim Group analyst Echo He, initiated Youku’s shares with a “Sell” rating, writing that the stock is worth no more than $22 a share, using a P/E of 100x the firm’s projected FY2013 profit.
Shares of Youku, which went public in December, are trading down 1.94% to $46.05 today. Approximately 637K shares have traded hands vs. average 90-day volume of 2 million shares. Day’s range: $45.50 – $47.40.
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