Manager: Patrick McFadden, M2 Global
Model: M2 Global
Disclosure: No position in stocks named
Youku.com (NYSE: YOKU) is one of the China-based competitors in the online video market. Unlike the United States, where Google’s YouTube is clearly the market giant, the Chinese market is more fragmented. The CIA World Fact Book indicates that there are likely more than 400 million internet users in China, while there are only about 250 million users in the U.S. However, on a disposable income per user basis, it is likely that the U.S. market still leads. Also, YouTube is clearly a global player, while Youku is much less so.
Our Covestor portfolio invests long-only, but we also do internal analysis for short ideas, and we believe Youku (NYSE: YOKU) is an attractive short play near its current approximately $60 range (as of 4/15/11).
Google paid $1.6 billion for YouTube a few years ago and YouTube is estimated to have more than $1 billion in revenue this year. But investors often don’t seem to realize that bandwidth, content providers and engineers cost money and that these businesses are not super profit centers. For Google and potential corporate buyers of Youku, such companies may coalesce user scale, but they are not necessarily future profit drivers on the same scale.
Assuming YouTube has operating profits of $200 million and represents $5 billion in value within the Google stock price (which is likely a high assessment), we would mark it at 25 times EBITDA. Youku’s EBITDA for 2010 was negative $15 million on $287 million in revenues. Assuming the company has positive EBITDA of $50 million in 2011 (which is unlikely), the company is as of 4/15 trading at nearly 125 times forward EBITDA and more than $6 billion in market capitalization. Clearly, current long investors are taking great secular and global macro market risks.
If Youku had fantastic opportunities outside of China (which it likely does not), and if it did not have serious competition within China (which it does), investors would not want to take the risk of shorting this company. We believe fair value for this company is less than one-third of its current share price. This is still nearly 50% higher than the price Goldman Sachs and Youku set at the IPO and they are likely in the best position to know.
Therefore, we believe selling short above $60 and closing the position above $30 is a potential capital appreciation play.
Pat McFadden
M2 Global
Sources:
CIA World Fact Book for China, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
Yahoo Finance for YOKU
“Citi: Google’s YouTube Revenues will pass $1 Billion in 2012” Erick Schonfeld, Techcrunch, 3/21/11 http://techcrunch.com/2011/03/21/citi-google-local-youtube-1-billion/
