Why Shares of Youku Tudou Inc Fell on Friday

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Continue Reading Below

What: Shares of Youku Tudou fell as much as 12% on Friday, notching a new 52-week low in the process, after the company announced disappointing fourth-quarter results. Further compounding negative sentiment, the Chinese Internet television company also said the U.S. Securities and Exchange Commission is looking at several aspects of its accounting and that the "financial information presented [in its fourth-quarter results press release] is subject to change."

So what: Youku Tudou's fourth-quarter "miss" was not insignificant, with adjusted earnings per share coming in at a loss of RMB 1.18 compared to Wall Street's expectations for a loss of RMB 1.00. The company's forecast range for revenues in the current quarter of RMB 1.01 billion to RMB 1.03 billion is a bit higher than the 987 million analysts were expecting, but given the uncertainty concerning loss, er, profit margins, the difference is immaterial.

Now what: In the wake of these results, Deutsche Bank downgraded Youku Tudou's shares to 'sell' from 'hold' and slashed its price target 41% to $10.90, saying it's "likely too late" for the company to recapture momentum in the Chinese Internet television market. Reuters BreakingViews was similarly downbeat:

As Youku Tudou doubles down on new ventures from movie production to gaming to offset its Internet video business, profitability looks even more out of reach...The question for investors is whether to stick around to see how Youku Tudou's turnaround saga ends. A sale to Alibaba may not be a bad conclusion for China's only stand-alone Internet video business. But the chances of a successful second season are looking increasingly slight.

I can't encourage investors to bet on a potential takeover -- that isn't investing. Youku Tudou has now recorded seven consecutive years of losses and negative free cash flow. With scant evidence that the company can turn that trend around, this isn't a stock worth betting on, period.

Continue Reading Below

The article Why Shares of Youku Tudou Inc Fell on Friday originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.