No room for two ‘China YouTubes’

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Chart: CNNMoney

What’s that they say about first mover advantage? Chinese online video site Tudou learned that the hard way today. The company had a disappointing debut as a public company. Shares priced at $29 (the midpoint of its range) and were down about 6% in late trading. The stock dipped as much as 19% at one point. IPOuch!

So why did investors shun Tudou? After all, it’s a social media company in the world’s largest market. What’s not to love? You could call it China’s YouTube! But oh wait. We already had another Chinese YouTube go public late last year.

Yup, it seems that Tudou is suffering from the fact that it may be too similar to Youku, a Chinese online video site that went public in the U.S. last December and enjoyed a much better reception. Youku’s stock more than doubled on its first day of trading.

Adding insult to injury, Youku shares rose 9% today. Some of it may be due to the fact that investors unimpressed with the me-too-ism of Tudou decided to buy Youku instead. But there were also rumors flying around that Chinese Internet titan Tencent was considering an investment in Youku.

Whatever the reason for Youku’s stock rise and Tudou’s tepid coming out party, one thing is clear though. Investors may have been overly excited about Youku and overly bearish on Tudou. China, in case you forgot, is big. There is room for more than one online video service just like there is room for YouTube, Netflix, Hulu and others in the U.S.

I spoke with Tudou CEO Gary Wang about his company and the IPO. Wang said that he is not worried about the stock’s initial slide. He argued that Tudou is just as big of a household name in China as Youku and that his company is on its way toward becoming profitable.

Wang also said that he didn’t consider shelving the offering despite the fact that the global financial markets have been a bit volatile as of late.

"The way I look at it, I can’t time the market. I don’t know what will happen tomorrow. It’s like climbing a mountain. I just want to make sure we have sure footing," he said.

So give Wang credit for being brave. He took his company public just one week after stocks rose Wall Street’s version of the Great American Scream Machine. It was also a brazen bet that investors would forget Youku existed and treat Tudou as if it were a novelty.

And Tudou still raised a decent chunk of change ($174 million) in the offering. And one day does not a failure of success make. China’s online video market will still bear watching. Heck, one day maybe a profitable Chinese online video company will decide to go public. But that’s probably just silly talk. — Paul

Private company stock: Who’s hot and who’s not

The folks over at SecondMarket released their Q2 report today, detailing the crazy world of trading stock in companies that haven’t gone public yet.

SecondMarket launched in April 2009, spurred by the fact that few tech companies had gone public — leaving employees and early investors holding stock that was essentially illiquid, unless they could arrange a private sale to an interested buyer. 

Now, however, the frozen tech IPO market has been thawing. And other companies are going the buyout route.

Obviously, that’s shaking up the stats for those left in the private market. Let’s take a look, shall we?

The top 10 most watched companies on SecondMarket is not exactly a shocking list but, as we’ll discuss, there are some issues with a few of these:

1. Facebook

2. Twitter

3. Groupon

4. Zynga

5. Foursquare

6. Skype

7. Yelp

8. Dropbox

9. Gilt Groupe

10. LivingSocial

Verrrry interesting (I would run my fingers through my beard here if I had one); nearly a third of these top ten are out of the game now.

Our No. 3, Groupon, filed for an IPO last month. Zynga, the cleanup hitter, followed suit a few weeks later. Sixth man Skype announced in May that Microsoft will buy it for $8.5 billion.

I asked SecondMarket who came in at No. 11 and would have cracked the top ten list if Skype had been removed. Funny enough, it’s another company in play for a buyout: red-hot Hulu.

Further mucking the top ten list for last quarter: two completed IPOs. LinkedIn and Pandora emerged in the public arena in Q2, freeing up space for Dropbox and LivingSocial to make the most-watched list.

It’s been interesting to watch how a looser IPO and buyout market has affected SecondMarket. With fewer private companies and less pent-up demand on the buyside, SecondMarket’s transaction totals in the sector have declined.

In Q4, transactions doubled to $158 million. But then they slipped to $156 million in Q1 (the company revised the originally reported figure much higher in Tuesday’s report), and fell to $112 million this past quarter.

Still, as the big names leave private markets for potentially greener pastures, of course some new hotshots are rising in the ranks. SecondMarket’s “rising stars” list for Q2 is, in order: Kickstarter, PopCap, SharesPost (a SecondMarket competitor! meta!), LegalZoom and Lending Club.

But there’s trouble with this list, too: PopCap was snapped up by Electronic Arts this month. And so the tech world turns. —Julianne

Does the SEC have any rules about spokescats?

Filing for its IPO put Groupon into its “quiet period,” the pre-IPO stretch in which executives are supposed to avoid comments that could be perceived as hyping their upcoming offering. Groupon’s top brass can’t respond to the torrent of criticism about the company’s giant losses, unorthodox accounting tricks, and risky business model.  

So they had their spokescat do it for them. The cat’s latest blog post offers a grumpy “guide to the ‘quiet period,’” the stretch of time in which companies are “legally prohibited from saying anything to the press that may make the company look ‘good,’ ‘successful,’ or ‘not currently on fire.’” 

As part of the press corps that’s poking Groupon with sharp, pointy things (seriously, their accounting is very worrisome, and have you seen their chairman’s past entrepreneurial track record?), we’re not feeling particularly sympathetic — but we’re amused by Groupon’s venting mechanism. One commenter was especially impressed by the cat’s way with wry quips: “Those LOLcats lull one into a false sense of security – they actually have excellent grammar.” -Stacy 


NetQin doesn’t cash in on China craze

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Chart: CNNMoney

Many China tech companies have enjoyed stellar debuts in their public offerings in the United States. NetQin is not one of them.

NetQin, a maker of mobile security software, priced its offering at $11.50 a share, the high end of its range on Thursday. But the stock fell nearly 20% Thursday and dropped another 8% on Friday. 

But the company’s management team doesn’t appear too worried. I met with chief executive officer Henry Yu Lin and chief financial officer Suhai Ji at CNNMoney’s offices. Ji said the company was a bit surprised by the tepid response to the IPO, especially since it did price at the upper end of its offering range.

It does seem a bit odd. While NetQin may suffered from poor timing, going public on a day when the broader stock market plunged as commodities got dumped, it does appear to have what it takes to succeed for the long haul.

Qulacomm and HTC are strategic investors. VC firm Sequoia is a backer as well. Revenues are up big, but the company (like most tech IPos) is losing money.

It could be a simple case of China IPO fatigue. Renren, aka China’s Facebook, also debuted this week and didn’t live up to the hype. Another Chinese Web security firm, Qihoo 360, also recently went public.

But Ji pointed out that there are so many smartphone users that still aren’t protected from viruses and other bugs. The market opportunity is enormous and entrenched security companies like Symantec, Trend Micro and McAfee (now owned by Intel) still are more focused on the PC market as opposed to mobile.

"The more apps you have, the more potential threats there are," he said.

Ji added that the company’s software is “platform agnostic.” NetQin, despite backing from Android beneficiaries Qualcomm and HTC, are not betting the ranch on Google.

Even though many people assume the mobile race is all about Google vs. Apple,  said he expects the smartphone market to remain fairly fragmented.

Lin said there should still be room for Research in Motion (BlackBerry and QNX) and Nokia. He pointed out that while many in the U.S. are treating Nokia’s Symbian as if it’s dead because of Nokia’a alliance with Microsoft and Windows Phone 7, Symbian still has a significant chunk of the mobile market in Asia.

Of course, there are risks. And it’s somewhat refreshing to see that investors aren’t bidding up every China IPO just because it happens to be located in China.

Ji conceded that the company needs to do more to make its brand known with consumers and enterprise customers. Li said that expansion in the U.S. and Europe will be key.

Still, NetQin shouldn’t be written off just yet. I wrote not too long ago about a little company called BroadSoft. It too had a poor debut but shares have surged in the months since then thanks to strong earnings growth.

It just goes to show that it’s not the first day or two that counts most for a newly public company. Too many IPOs burn out after big first-day pops. There’s nothing wrong with being the proverbial tortoise. You can still win the race.  — Paul

Good — but not great — day for Renren

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Chart: CNNMoney

So much for Renren being the next China dot.com double. The social networking company (often dubbed China’s Facebook) had a good but not otherworldly debut on the NYSE Wednesday.

Shares rose nearly 30%. To put that in perspective, Youku and Qihoo 360 both more than doubled. Renren also lost ground as the day wore on. It was up more than 70% shortly after it began trading.

Still, it seems that China remains a hot market for Internet stocks. David Chao, general partner with Silicon Valley venture capital firm DCM, which took a big stake in Renren before its IPO, talked to me Wednesday afternoon.

While he could not comment directly on Renren, he said that industry leaders in China should do well in the long run. His firm is looking for companies that are among the biggest in their respective market.

That’s why DCM has also invested in companies like e-commerce leader Dangdang, career site 51job and Bitauto, which provides online marketing services for car companies as well as pricing information for consumers.

Renren, despite all the hype of it being both Chinese and big in social media, may have been tripped up a bit due to some concerns about the head of its audit committee stepping down as well as the fact that Renren revised a figure about how many unique users it had in its latest regulatory filing.

But let’s be honest, if you price your IPO at the high end of your range (after bumping up said price range to begin with) and still close about 30% higher, that’s a sign of strong demand. China dot-coms may or may not be absurdly overvalued. But the bubble didn’t pop Wednesday just because Renren didn’t have a triple-digit percentage gain.

And if investors are hungering for more China tech, they’ll get another chance soon. NetQin, a mobile security firm, is tentatively set to debut on Thursday.I

I’m meeting with NetQin CEO Dr. Henry Lin, on Friday afternoon. So I’ll post something on Tumblr after that interview.

As an aside, it was great that CNNI put up a screen shot of a Tumblr post I did last week on Renren during my TV hit on Renren this morning. Nice to get some broadcast love for our humblr Tumblr! — Paul

Groupon? Twitter? Zynga? Craigslist is hotter than them all.

Very interesting report from Caris & Co. Internet analyst Sandeep Aggarwal today. Although Aggarwal mainly follows the big publicly traded Web stocks — your Googles, Amazons and eBays of the world — he obviously keeps track of the top private firms as well.

Aggarwal and his team put out an exhaustive list of 400 top private Internet companies Monday morning. They ranked their top 15 by looking at “traction, business momentum, global impact, brand, and revenue generation potential.” Here’s the list. As you’ll see, there are some surprises.

  1. Facebook
  2. Craigslist
  3. Wikipedia
  4. Mozilla
  5. Groupon
  6. Zynga
  7. LivingSocial
  8. Twitter
  9. LinkedIn
  10. Gilt
  11. Hulu
  12. Kayak
  13. Travelocity
  14. Pandora
  15. Skype

The fact that Craigslist, Wikipedia and Mozilla are “hotter” than Zynga, Groupon and Twitter was somewhat shocking given how much press the latter three get. But it goes to show that being boring isn’t a bad thing if it means you are actually generating solid sales.

It was also very interesting that LivingSocial, which seems to lag Groupon badly in the “buzz” department, was ranked so closely to its Chicago rival. I was also surprised that Foursquare did not make the cut.

Aggarwal and his team didn’t stop with this list though. They also ranked a top 20 list of IPO candidates. Facebook obviously topped that list too.

But Craigslist, Wikipedia and Mozilla were not among the top 20. Aggarwal told me in a phone interview that’s only because he thinks those companies are unlikely to ever go public based on comments made by their founders and top executives.

Groupon was number 2 on the IPO list. Twitter was # 6, behind LivingSocial, LinkedIn and Zynga. Of course, several private Web companies have already filed to go public, including LinkedIn, Pandora, Skype and Kayak.

Now, everyone is wondering just how well some of these companies will do and if there is a new bubble brewing in Silicon Valley.

For what it’s worth, research firm GreenCrest Capital is trying to dial down the expectations a bit. In a report it e-mailed me Monday, analysts said it estimated a market value of about $11 billion for Groupon and $7 billion for Twitter.

While that’s still extremely rich, it’s considerably lower than the $25 billion some others estimate Groupon could be worth and $10 billion targets for Twitter. Hopefully though, all the speculation will soon be put to rest.

It’s not yet clear when LinkedIn or Pandora will graduate from private companies to publicly traded stocks. But once they do, their success (or failure) will go a long way toward determining whether Facebook, Groupon, Zynga and Twitter really deserve those eye-popping 11-figure valuations they are fetching in the shadowy private market world. — Paul

Facebook, Inc. is currently our largest customer and accounted for a substantial portion of revenue during the six months ended December 31, 2010. We expect revenue from sales to Facebook and one other end-user to account for a substantial portion of revenue for the three months ending March 31, 2011, but that revenue from sales to Facebook and the other end-user will decline significantly for the three months ending June 30, 2011 as they complete their planned deployments. As a result, our quarterly revenue and operating results are likely to fluctuate in the future and will be difficult to estimate.

That’s what storage company Fusion-io has to say about itself in its IPO filing with the SEC. The company filed to go public today. But even with all the Facebook biz and the blessing from Wall Street big guns Goldman Sachs, Morgan Stanley, J.P. Morgan and Credit Suisse, remind me why anyone should consider investing in this stock?

Sure, revenues are growing like a weed. But Fusion i-o lost $32 million in the fiscal year ending in June of last year. It lost another $8 million in the last six months of 2010. It also competes with established (and better capitalized) storage heavyweights like EMC and NetApp. And as the company admits, its sales should fluctuate wildly going forward. Here’s a tip. Don’t “friend” this IPO. — Paul

The best tech stock you’ve never heard of

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Chart: CNNMoney

There are plenty of tech stocks that soared on their first day of trading only to come crashing back to Earth after the IPO euphoria faded. BroadSoft is not one of those tech stocks.

The company, which makes software that helps telecom carriers transmit calls over the Web, went public in June 2010 at a price of $9 a share. That was at the low end of the company’s $9 to $11 offering range. The stock then fell nearly 8% during its debut, closing at $8.30. Many people quickly wrote off the company. That would have been a huge mistake. 

Nine months later, BroadSoft is now trading just below $50 a share. That’s a gain of almost 500%. The stock surged nearly 40% alone on Tuesday on the back of an incredibly strong earnings report.

BroadSoft, whose customers include most of the big phone companies like Verizon and Sprint, said Monday after the closing bell that sales in the fourth quarter soared 85% from a year ago. The company posted a profit of about $11 million, up from earnings of less than $400,000 a year earlier.

This growth is obviously impressive. But can BroadSoft possibly keep climbing from here? Brent Bracelin, an analyst with Pacific Crest Securities in Portland, Ore., thinks so.

Bracelin notes that only a small percentage of corporate telephone lines have been converted from legacy time-division multiplexing (TDM) switches to the software that makes Voice over Internet Protocol or VoIP possible. He estimates that just 4 million of 62 million business lines have shifted from TDM to IP.

"The excitement is less about what BroadSoft is doing today and more about how many more lines BroadSoft’s customers have yet to transition," he said.

A valid point. But investors probably have reason to be a little nervous.

The stock now trades at nearly 90 times 2011 earnings estimates. If that kind of valuation doesn’t hark back to the tech bubble days of the late 1990s and 2000, I don’t know what does.

Bracelin thinks BroadSoft is a good bet for the long haul. But he concedes that BroadSoft is likely to be a stock that traders will feast upon, increasing the chance that it will be insanely volatile in the short-term. 

And for what it’s worth, short interest (the number of shares held by investors betting the stock will go down) was about 1 million shares as of mid-February. That accounts for about 9% of the total available shares outstanding. Not an insignificant amount.

Today’s move may attract even more BroadSoft bears. A user on StockTwits going by the name of ninanina65 commented that BSFT is the “short opportunity of a lifetime NOW at $50.” That may be a stretch.

Gilad Shany, an analyst with Baron Funds in New York, noted that just because a stock goes up sharply doesn’t mean it has to be overvalued. He said that small cap stocks, particularly ones that are relatively undiscovered, can move dramatically on good news. BroadSoft is a holding in the Baron Opportunity fund.

“When a stock moves so quickly, you do have to stop, think and reassess the investment thesis. But we still like the fundamentals,” Shany said.

But now that BroadSoft has graduated from IPO dud to tech stock stud, the pressure will be on to keep beating earnings and sales estimates by a wide amount. With a stock that’s priced for perfection, it may be a rocky road for BroadSoft in the coming months.  — Paul

The next hot China dot-com IPO is … Yahoo?

Layoffs and site shutdowns aside, there may finally be some good news for those left at (or investing in) Yahoo to celebrate. The stunning performance of Youku.com (aka China’s YouTube) and Dangdang (China’s Amazon) since going public earlier this month could make it easier for Yahoo to cash in on (the official Wall Street jargon is “monetize”) on China Web IPO mania.

Yahoo owns a 40% stake in China’s Alibaba, the Web conglomerate that has several hot Chinese online properties in its mix. The one with the most sex appeal is Taobao, an online marketplace that’s often referred to as … you guessed it … China’s eBay.

Marianne Wolk, an Internet analyst at Susquehanna Financial Group, wrote in a report Friday that an IPO for Taobao may now come sooner rather than later because of how well YOKU and DANG have done. YOKU has gained nearly 140% from its offering price while DANG is up almost 60%.

Wolk wrote that Taobao, citing estimates that it may generate more than $7 billion in sales in 2012, could be worth as much as $50 billion in an IPO if it merely traded at the mid-point of the valuation range for YOKU and DANG.

With that in mind, Wolk thinks that the total of Yahoo’s Asian investments — which also includes a stake in Yahoo Japan! — could be worth $18 a share for Yahoo. Here’s the funny/sad part. Yahoo is currently trading at about $16.50 a share.

So investors may essentially be saying that Yahoo’s core business (whatever that is these days) is worthless.

If Wolk is right (other bullish Yahoo investors have also pointed to the potential for Yahoo to generate a ton of cash from liquidating its Asian investments) then Yahoo would appear to be a screaming bargain right now.

But a lot of “ifs” have to fall into place first. Yahoo has been a company that has routinely disappointed investors for about 5 years now because best-case scenarios never seem to pan out.

Based on its track record, would it be any surprise if China’s central bank raises interest rates, its economy cools and Web bubble bursts before Yahoo is able to sell its stake in Taobao? — Paul