INTERNET: Vipshop Stock Under Attack, iQiyi In Merger Denial
Bottom line: Shares of Youku Tudou and Vipshop are likely to remain stable over the next few weeks, as the former moves towards a rumored merger with iQiyi and the latter fends off a short seller attack.
Two stories with big implications for individual company stocks are in the news as we begin the new week, led by a denial from Baidu-backed (Nasdaq: BIDU) online video site iQiyi that it’s in talks for a merger with large rival Youku Tudou (NYSE: YOKU). The other big news has high-flying discount e-commerce site Vipshop (NYSE: VIPS) coming under a short-seller attack, prompting it to issue not one but two separate statements denying the allegations. The week ahead could be bumpy for both of these stocks, which is why I’m weighing in with my own view of what may be happening behind the scenes.
Let’s start with Youku Tudou, whose shares soared last week when rumors first emerged that it was in talks for a deal to combine with iQiyi. Following those gains, which boosted the stock to a one-year high, iQiyi’s CEO Gong Yu has come out and denied the rumors, adding that neither iQiyi nor its stockholders have been in any talks with Youku Tudou. (English article; Chinese article)
I don’t usually write about this kind of denial since Chinese companies often deny rumors even when they are really true. But in this case such a merger would be rather large and quite advantageous to both companies, prompting me to give my view of what may be happening behind the scenes. A very similar deal involving Baidu occurred last year, involving rumors of merger talks between its majority-owned online travel service Qunar (Nasdaq: QUNR) and industry leader Ctrip (Nasdaq: CTRP).
That deal was reportedly being engineered by Baidu’s founder Robin Li, but ultimately collapsed because Ctrip’s founders wanted to maintain control over a merged company. (previous post) I suspect that something similar is happening now, with Robin Li talking directly with Youku Tudou’s CEO Victor Koo about a merger of their money-losing video operations that would create an industry leader that might be able to quickly turn a profit.
In this case it’s possible that iQiyi’s Gong has simply been left out of the talks, and could ultimately be sidelined in an eventual deal. Something similar happened when Koo’s original company, Youku, merged with chief rival Tudou in 2011, ultimately forcing out Tudou’s founder Gary Wang. Some are predicting Youku Tudou’s shares could slide this week on the iQiyi denial, but I would advise any short sellers to wait another week or so before placing bets based on a big share slide.
Next let’s look at Vipshop, which has been a Wall Street superstar since its listing in 2012. Its shares have risen more than 60-fold at one point when they reached an all-time high last month. Yet despite its huge surge, which has given it a market value of $15 billion, the company is still far less known than bigger rivals like Alibaba (NYSE: BABA), JD.com (Nasdaq: JD) or even Suning (Shenzhen: 200104).
Short sellers have probably been eying Vipshop’s meteoric stock rise for quite a while now, and a couple chose last week to make their move by issuing reports questioning its accounting. The allegations center on Vipshop’s method for tallying its revenue, which they claim overstate the actual numbers. A key element of the allegations lies in discrepancies between revenue that Vipshop reports to shareholders and figures it reports to China’s commerce regulator.
Vipshop says there’s nothing wrong with its accounting, and invites shareholders to do their own research based on publicly available information. (company announcement) Vipshop’s revenue has risen at triple-digit rates for most of its life as a publicly traded company, including a 100 percent increase in its latest report. All that said, its stock still trades at a relatively reasonable valuation and its revenue looks quite reasonable for a company of its size, prompting me to guess the short-seller attack will probably be short-lived and the company’s stock won’t suffer much long-term effect.
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