INTERNET – Losses Disappoint At Sina, Youku

Bottom line: Shares of Sina and Youku Tudou will continue to be laggards due to their cloudy outlooks, and Youku Tudou could face even greater pressure if it doesn’t sell itself to a larger buyer like Alibaba.

Sina’s Q3 results fail to excite

Today marks the high point of the third-quarter earnings season for Internet companies, with leading web portal Sina (Nasdaq: SINA) and top online video site Youku Tudou (NYSE: YOKU) posting results that didn’t impress investors too much. Both companies reported operating losses for the quarter, even though each managed to pare those losses from previous periods. But the bottom line for Sina was anemic growth in its core advertising revenue, while Youku Tudou’s biggest trouble sign came from ballooning costs. Youku Tudou isn’t being helped either by an ongoing government crackdown against online video operators.

The lackluster reports from both companies showed up in their share prices, with Sina and Youku stock shedding 3.8 percent and 5.9 percent, respectively, after they announced their results. Sina’s shares have now lost half of their value from the start of the year, while Youku Tudou shares have lost about a third. Those declines contrast with many other Chinese Internet stocks, which have rallied sharply this year on a wave of investor enthusiasm about newer growth areas on the web.

Sina is one of China’s oldest Internet names, and its traditional desktop-based web portal is rapidly showing signs of aging. The company was one of China’s first online companies to go public, and was an investor darling for years before recently being overtaken by younger rivals with better, more flexible products.

That reality has made Sina less attractive to the advertisers that form the backbone of its business base, accounting for more than 80 percent of revenue in the latest quarter. The company’s revenues grew by an anemic 8 percent in the quarter, with ad revenues up a slightly better 10 percent. But it forecast a slowdown in revenue growth for the current quarter, with the figure only likely to grow by about 5 percent.

Sina also reported an operating loss, which is never good for such an established player that was quite profitable in the past. The company’s only saving grace was its newer and recently listed Twitter-like Weibo (Nasdaq: WB) microblogging unit, which is still posting relatively strong revenue growth. But even Weibo is starting to look a bit stale these days in the face of competition from newer services, and I really don’t see much reason to get excited about Sina or its stock based on current trends.

Meantime, Youku Tudou is slightly more exciting, since it’s in the younger and still developing online video space. Youku made headlines earlier this year when it received a major investment from e-commerce juggernaut Alibaba (NYSE: BABA), and was in headlines again earlier this week when it received another small investment from fast-rising smartphone maker Xiaomi. (previous post)

But those votes of confidence weren’t enough to offset disappointment at the company’s latest results. The big figures were encouraging enough, with revenue rising nearly 30 percent and forecast to grow at similar levels in the current quarter. Equally encouraging, Youku’s net loss narrowed by 18 percent, as it continues its elusive search for long-term profits. But there was downbeat news in the company’s costs column, as operating expenses and sales and marketing costs jumped by 44 percent and 67 percent, respectively.

The fast-rising costs reflect the fierce competition in the sector, as well as sophisticated and costly technology needed for video streaming. Those elements aren’t likely to ease anytime soon. The current crackdown on video site operators also doesn’t look too good for the sector over the next year or two.

I’ve previously said that Youku Tudou might be smart to sell itself to a cash-rich partner like Alibaba, which now owns nearly 20 percent of the company anyhow. Hopes for such a deal are probably one of the main factors now supporting the stock, and failure to make such a sale within the next year could raise some serious questions about Youku Tudou’s longer-term viability as a standalone company.

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