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Deconstructing Revenue Growth Assumptions Implied by Hot China Internet Stock Prices: Youku.com Edition
This is from Stone Street Advisors
I don't like stating the obvious, except when it seems many if not
most are seemingly oblivious to it. Such, I believe, is the case with
the stock price of Youku.com (YOKU). As I shared last week, I believe the firm is grossly over-valued even
when assuming amazing revenue growth and margin expansion over the next
decade. We're talking 70% average revenue growth for the next 10
years. Off the top of my head, I'm not sure any firm of this size has
achieved a decade-long run that impressive in the history of the
corporation!
This should be obvious, but firms can only grow so
much, so fast. YOKU makes substantially all of its money from online
advertising, which means its revenue growth is bounded by two factors:
the growth rate of the Chinese internet advertising market, and its
share of said market. The very-same "independent" research firm YOKU
cites in its regulatory filings - iResearch - says the market only (yes, only) grew 54% last year, yet YOKU's revenues grow three times as fast (152%)!
The
only way for this to happen (and continue to happen) is for the market
to grow faster than estimated, the sub-market in which YOKU operates -
online video advertising - grew (and will continue to grow) faster than
the broader internet advertising market as a whole, and/or YOKU made
(and will continue to make) HUGE market share gains last year. (YOKU
could also expand into new markets, but for our purposes, we'll assume
the company invests most of its capital in the internet video space.)
Of course there is another way - falsifying revenue - but as I have done
in my financial analysis, I'm working on the (very possibly
unrealistic) assumption that YOKU's financials are fraud-free.
In
order to rationalize YOKU's current (at the time of my analysis last
week, around $42/share) price, not only did YOKU's revenue growth rate
have to significantly outpace that of the industry rate, but going
forward, it will have to continue to do so for years to come! Even if
Victor Koo is the most brilliant CEO the World has ever seen, he is
still (using our no fraud assumption) faces real-world constraints in
how fast he can grow the company.
If we take a deeper look at the
industry and YOKU's position within it, I think it will become even more
crystal clear that YOKU's share price - driven largely by unrealistic
revenue growth assumptions - is still quite over-valued.
China Online Video Advertising Market
YOKU quotes an iResearch report (presumably a newer version of this one,
which I've yet to read given our budget of approximately $0) which estimates the following growth rates in the internet video advertising market:
YOKU's still-private competitor, Tudou, included what must be slightly more dated metrics in its F-1 regulatory filing late last year about the Chinese online video market, screenshot here:
According
again to the iResearch estimates in Toudu's filings, "according to a
survey on 17 major advertisers' online advertising spending in China,
total online video advertising spending is set to grow" at a CAGR of
65.3% from 2010-2013, with the growth rate declining from 85% in 2011 to
52% by 2013. The numbers quotes in YOKU's more recent prospectus (from
which the screenshot is taken) filed last month, the CAGR is 66.3%
2011-2013, and the rate is set to decline from 74% in 2010 to 66% in
2013. Again, assuming the numbers in YOKU's filing are more
updated/recent than in Toudu's, you should notice how the 2010 rate was
significantly adjusted down from 107% to only 74%, while estimates for
2011, 2012, and 2013 were adjusted from 86%, 59%, 52% to 65%, 68%, and
66%, respectively.
As I haven't read the report I can only guess
as to why these numbers were changed, but considering the
nearly-identical CAGR (only a 1.6% difference) between the presumably
newer and older numbers, it looks alot like the 2011, 2012, and 2013
estimates were fudged to solve for a similar CAGR. If that is even
remotely close to what happened, don't be surprised if/when these
estimates are revised-down over the next three years, that is, prudent
investors would be well-served to assume the actual growth rates will be
at least slightly lower than the iResearch's estimates.
Market Share
YOKU
says it had a 21% share of the China online video advertising spending
in 2010, while Tudou says as of 9/30/2010 it had approximately 18% share
(stated 71.7mm users/2010 estimated 394mm online video users). Other
competitors like 56.com
claim to have approximately 8-14% share (imputed) depending on whose
numbers you believe (if any). Various news sources have suggested that
larger, more entrenched and established companies like Sohu and Bidu (Qiyi.com)
have been successful in gaining market share with their own online
video efforts, and plan to invest even more in them going forward.
Considering the intense competitive landscape, I would be quite
surprised if YOKU was able to make any material gains in market share
absent some sort of significant shock like the PRC government going
after a competitor, a transformative acquisition (using the company's
over-priced shares as currency) or something along those lines.
Conclusion
The
aggressive revenue growth assumptions I used in my analysis give YOKU
~27% of the estimated Chinese online video advertising revenues by
2013. While its not impossible that YOKU becomes THE de facto
destination for online video in China or for the market to grow faster than forecasts, I find it EXTREMELY improbable that either happen, especially to the degree implied by recent/current stock price.
**UPDATE: a
friendly commentor brought our attention to a newer report on online
video in China not available in English from what I can tell. Here is
the iResearch 4-19-2011 translation. As it's a translation and I don't speak Mandarin, I'm not sure how much faith to put in it, but the numbers discussed should be concerning to those holding China internet stocks.
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