Top Line Analysis:
Figure 1 shows seasonality of Youku Tudou revenue. Quarterly revenue tend to increase over the year and drop down for the first quarter of the next year. This lower first quarter revenue is due to Chinese New Year holidays in that quarter. In addition, advertising spending in China has historically been cyclical, reflecting overall economic conditions as well as the budgeting and buying patterns of customers.
Due to revenue seasonal effect, we analyze revenue increase on a quarter-on-quarter basis. Figure 2 shows that quarterly revenues are constantly increasing compared to the same quarter of the previous year, though at a diminishing rate. Generally revenue prospect is healthy for Youku Tudou.
Bottom Line Analysis:
From Figure 3, Youku Tudou is making volatile losses on a quarterly basis.
Figure 4 shows an improving quarter-on-quarter net loss since 2013Q4. Yet, 2014 Q1 reports only 3% improvement as compared to 2013Q1. We are still watching for more sustained and significant shrink in loss before we can give a better rating of the company stock.
Top Line V.S. Bottom Line?
Figure 5 explains the difference between top line growth and bottom line growth: the company is increasing its cost and expenses (especially copyright content cost, bandwidth cost and sales & marketing expenses) at such growing rates which even the increasing revenue is being unable to cover.
The company’s good top line performance indicates its effectiveness in sales generating. However, the negative bottom line performance suggests that the company is relatively ineffective with its spending and cost control. Some people comment that Youku Tudou and the whole industry are “burning money to gain revenue” (making money at any cost).
Due to the negative bottom line value, earnings per share (as shown in the last row of the Income Statement) are negative, indicating no profit allocated to per share of stock. Currently Youku Tudou stock is not bringing any return to its shareholders.
However, Youku Tudou enjoys the largest market share in China’s online video industry since their merge in 2012 (27.85% market share). With advertising being the main revenue-generating channel (Hulu mode), it makes advertising revenue by user traffic. This large market share helps Youku Tudou secure its sustained advertising revenue. Moreover, Youku’s IPO in NYSE enhances its reputation as an online video giant, which attracts more advertises and squeeze smaller companies out in face of loss. With fewer companies in the industry, Youku Tudou gradually gains supplier power, and started charging for its copyrighted video content (Netflix mode). The revenue-generating channel, if more diversified, could bring more revenue to the company. At the same time, with their integration, Youku Tudou also established its negotiation power with suppliers, which reduces content cost and bandwidth cost. Hence, even though in an industry constantly making loss, Youku Tudou has the potential to turn the situation around.
Also, in the second quarter of 2014, user traffic and advertising revenue might boost due to World Cup, leading to a shrinking loss. And in the long run, Youku Tudou’s strategic partnership with Alibaba may help it reduce bandwidth cost with Ali’s mature Cloud services and gain competitive edge from Ali’s network TV production. Hopefully the “burning-money” situation will turn around. However, we still need to watch for more future financial data to see the real effect of Ali’s participation before we could give a “buy” suggestion for Youku Tudou stock.