Monday, March 28, 2011

Be Wary of Youku

By Eric Jackson
RealMoney Contributor

3/28/2011 11:30 AM EDT
Click here for more stories by Eric Jackson

Youku (YOKU - commentary - Trade Now) has been probably the hottest IPO of the last 12 months. But there's good reason to be wary of holding the stock from here. Some growing competitive threats within China and a looming IPO lockup expiration in a little over two months will weigh on the stock.

Youku is a leader in the exploding online video space within China. It went public last Dec. 8 and closed at $33.44 -- 160% above its offer price of $12.80.

On Friday, the stock closed a penny under $50 -- its highest close ever. That means that it now has a market capitalization of over $5 billion. This is a company that did $23 million in revenue in the fourth quarter, with a net loss of $6 million.

Youku is a great "story stock," like Tesla Motors(TSLA - commentary - Trade Now) or some pre-revenue biotech company in a hot new space. It has low to no revenue but infinite upside, so the story goes.

I've defended the company before, especially at the time of its IPO and in the following weeks. Skeptics have been saying this company was over-hyped. In its defense, it is the No. 1 online video player in China today. Great U.S.-based venture capitalists have poured money into it. And its CEO, Victor Koo, is well-spoken and very credible. Listen to the recent earnings call, and you can understand why many U.S. investors would be comfortable buying into a company under his leadership. He gives the sense of a very steady hand on the wheel.

However, I can't defend Youku at the $50 range with over a $5 billion market capitalization -- 4x its IPO offer price.

When Youku went public, the most common reference point you heard in the U.S. media was that it was the "YouTube of China." Over the last couple of months, you hear a shift, and the majority of people drawing comparisons now call it the "Netflix (NFLX - commentary - Trade Now) of China."


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