CNBC Guest Blog
- Yoshikami: Four Things You Need to Know About Gold Now
- Steinbock: The Euro Zone Endgame Begins
- Laouchez: Leadership in Financial Services — Missing in Action?
- Kuntz: Finding Opportunity in Emerging Markets
- Busch: How to Trade the Euro on an Outside Reversal
- Dunkelberg: The Real Banking Crisis - They're Too Big to Manage
- Greek Exit a Worse Mistake Than Adoption of Euro
- Tamminen: Waste Not, Want Not
- Morici: The Eclipse of American Banking
- Will This Decade Be More Grim Than the 1930s?
MOST SHARED
- JPMorgan Dips into Cookie Jar to Offset "London Whale" Losses
- European Shares Buoyed by China Stimulus Hopes
- As Irish Head to Polls, ‘No’ Voices Get Louder
- Shell Puts Alberta Oil Sands Project on the Block
- Euro Isn’t Loved, but Few Want to Drop It, Poll Says
- US Law Firm Dewey Files for Chapter 11, Seeks Liquidation
- U.S. Winds Down Longer Benefits for the Unemployed
- Glitches Halt New Goldman Trade Platform
- China Moves to Tame Microbloggers
- Funds Cut Exposure to Euro Zone Banks
- A New Look at the ‘New Poor’
- Six Pack: Beer Buzz of the Week
- Greek Exit Could Trigger 50% Fall in Euro Stocks: Analyst
- Under Pressure, FHA Skews to Wealthier Home Buyers
- Big Stock Upside for Hudson City Deal: Analyst
- 5 High-Yield Stocks Ready to Boost Dividends
- Yoshikami: Four Things You Need to Know About Gold Now
- Steinbock: The Euro Zone Endgame Begins
- Option Bulls Take Another Shot on Idenix
- Euro Isn’t Loved, but Few in Europe Want to Drop It: Poll
- Euro Zone Bank Safety Net Leaves Holes Unplugged
- Glitches Halt New Goldman Trade Platform
- Greece Pours $22.6 Billion Into Its Four Biggest Banks
- Funds Cut Exposure to Euro Zone Banks
- US Markets Will Be Watching Europe—And Jobs Report
- As Irish Head to Polls, ‘No’ Voices Get Louder
- Emerging Markets to Test Lehman Lows on 'Grexit'
- Spain's Debt Costs Near Danger Level: Is Bailout Next?
RSS FEED
Rein: Beware a Chinese Internet Stock Bubble
Text Size 
Founder & Managing Director, China Market Research Group
Chinese online video site Tudou beat the odds in a terrible market and went public on Wednesday August 17, 2011. Tudou's bankers sold six million American depositary receipts at $29 each. They raised $174 million dollars and gave Tudou an $822 million market capitalization. They probably should have delayed the offering.
 |
Reality about Tudou's [TUDO
Loading...
()
] business model and financial health set in soon after trading started. Investors recalled the maxim that profits and not dreams eventually determine share price.
Tudou’s shares plummeted 33.7 percent to $19.24 by the end of the first trading week. After all, Tudou has already lost tens of millions of dollars this year and is not expected to turn a profit until 2013 at the earliest.
Its biggest competitor Youku [YOKU
Loading...
()
] has seen its share price nosedive 60 percent from its mid-April peak of $69.95 and remains unprofitable. Even with the share prices drop, I am concerned share prices are still way overvalued and short-selling investors will come crawling out.
Whenever stock analysts mention Tudou or other Chinese Internet stocks all I hear is that China has 480 million Internet users, young people with increasing amounts of disposable income. Also mentioned is the fact that millions of Chinese will have Apple [AAPL
Loading...
()
] iPhones and other smartphones soon and will want to watch videos on the go.
Who cares? Myspace had tens of millions of monthly visitors when Newscorp [NWS
Loading...
()
] sold it at a loss. Eyeballs don’t matter if consumers won’t pay for content or if advertisers won’t allocate enough budgets. Even though Tudou boasts clients like Yum Brands [YUM
Loading...
()
] Pepsi [PEP
Loading...
()
] and Procter & Gamble [PG
Loading...
()
], the reality is that most multinational firms’ digital marketing budgets in China remain at only 3 percent to 5 percent, far below the standard 8 percent to 12 percent in the U.S.
That won't change much anytime soon. Yet at the same time, more and more Internet sites, from microblogging sites like Sina Weibo [SINA
Loading...
()
] to Groupon-like buying sites, are emerging. In other words, there is increased competition for fairly small advertising outlays.
Shaun Rein
Founder of the
China Market
Research Group
I expected after the IPO, Tudou’s investors and management would talk about how Tudou would use its war chest to develop profits. Instead David Orfao, a Tudou board member and managing director of venture capital firm General Catalyst, focused on what Tudou would buy in an interview with the Wall Street Journal. He said Tudou “ need(s) to continue to buy quality video content. They need to scale their infrastructure. Delivering these videos in a quality manner with minimal delay is key."
The founder of Tudou, Gary Wang, told the blogger Gang Lu after the IPO that the proceeds raised would be used mainly for content, bandwidth and platform upgrades.
Orfao and Wang barely touched upon how Tudou would actually start to generate more revenues and profits, but on how they would buy stuff. That is deeply concerning for a company losing tens of millions a year.
If Tudou can figure out a way to develop a sustainable business model and lower bandwidth and other costs investors might want to take a look especially if the price drops further as they might become a takeover target for well capitalized firms like Baidu [BIDU
Loading...
()
].
Aside from not adequately developing a sustainable business model, there are two other risks investors should heed:
First, investors should not underestimate increasing regulatory risk in the Internet sphere in China. The government sees video sharing and social media sites as potentially causing instability. With tensions flaring because of severe inflation that hit 6.5 percent last month and with the leadership transition taking place in 2012, the government will increase Internet crackdowns.
Second, because budgets for digital marketing are so low, most multinationals outsource decision-making on what media to run advertisements on to media buyers. The dirty little secret in media buying is that they often allocate where they get the best rebates rather than to the most effective advertising channels.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai.
He is the author of the upcoming book “The End of Cheap China: Economic and Cultural Trends that will Disrupt the World” published by John Wiley & Sons in the U.S. He does not own shares in any company mentioned. Follow him on Twitter at @shaunrein.
Data is a real-time snapshot *Data is delayed at least 15 minutes
