Youku and Dangdang: Stuck in the Red 优酷和当当：生存在亏损

By newsdoug on May 18, 2012

Dangdang turns the corner Two of China’s money-losing Internet companies to make New York IPOs at the height of an investor frenzy for their shares in 2010 have posted more losses, though e-commerce firm Dangdang (NYSE: DANG) and online video leader Youku (NYSE: YOKU) appear to be moving in different directions in their quest for profits. Let’s look at Dangdang first, which was profitable when it first went public, but slipped deeply into the red last year as competition intensified with other names like Jingdong Mall in China’s crowded e-commerce market. Dangdang posted its third consecutive quarterly loss in its latest reporting period, losing $15.8 million to be exact. (results announcement) Investors certainly didn’t seem to like the news, bidding down Dangdang shares by 16 percent after the numbers came out. But from my perspective, the numbers actually do appear to show that Dangdang may have turned the corner and its situation may be improving, which is good not only for the company but also for the broader e-commerce space where most players are now losing money as they fight for market share. In terms of actual numbers, Dangdang’s first-quarter loss was actually an improvement from the previous quarter, when it lost $21 million. Furthermore, the company’s gross margins also improved to 14.2 percent from a low of 10.5 percent in the previous quarter, though the figure is still well below the nearly 20 percent figure from a year earlier. It’s too early to say if Dangdang is back on the road to profitability, but if it can sustain this latest trend into the current quarter it could actually have a chance of returning to the black by the end of the year. That situation contrasts sharply with Youku, which reported its net loss more than tripled in its latest reporting quarter, even as revenue more than doubled for the period. (results announcement) The cause for the big jump in net loss appears to be ballooning costs, with operating costs up 140 percent while administrative expenses tripled. Rapidly rising costs isn’t necessarily a bad thing for a company at Youku’s stage of development, but only if that rate of increase is roughly comparable to the revenue growth rate. Ideally, costs should grow more slowly than revenue, showing a company is achieving better margins as it gains bigger scale. But in this case the opposite seems to be true for Youku, with costs growing much more rapidly than revenue. Further clouding the issue, Youku forecast revenue in the current quarter would only rise 90-100 percent, a slowdown from the 111 percent growth rate in the first quarter. Investors also punished Youku stock, which fell 10 percent before the results came out though its shares rebounded slightly in after-hours trading. Youku’s problems are only likely to grow as it prepares to merge with rival Tudou (Nasdaq: TUDO), which will bring together 2 very different corporate cultures. All that said, if I were an investor in these companies, I would say the outlook definitely looks much brighter for Dangdang than Youku over the next 12 months.

Bottom line: Dangdang could return to the profit column by the end of this year as e-commerce competition eases, while Youku may have to wait a year or more for its first profits.

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