VIDEO: Toutiao and YY Subsidize, Weibo Rules

Bottom line: Stellar earnings by Weibo and new funding for services from Toutiao and YY reflect the rapid rise in live broadcasting and short videos, in the latest boom for China’s internet that will end with a bust in around 2 years.

Live streaming sucks up big funds

A trio of stories in the headlines are nicely spotlighting the oh-so-typical Chinese pattern of industries that suddenly become hot, leading people to pump huge amounts of cash into them in a fight for market share. Internet watchers will probably guess that I’m talking about the recent crazes in live broadcasting and short videos , which have thrust three companies, YY (Nasdaq: YY), Toutiao and Weibo (Nasdaq: WB) all into the headlines.

Leading those headlines are the latest results from Weibo, whose profit has risen nearly 7-fold in its quarterly report, igniting a 25 percent rally for its already-inflated stock. The other two headlines have YY and Toutiao pumping big new funds into their live broadcasting and short video services, $70 million and $140 million to be exact, respectively.

It doesn’t take a rocket scientist to read the tea leaves in this instance, namely that these video services have entered the typical bubble stage that we see all too often on China’s Internet. The bigger question, of course, is whether this latest trend will have any staying power. Previous bubbles for industries like group buying seem to have faded as quickly as they rose, whereas others like online video services seem to have more solid futures.

We’ll return to the staying power question shortly, but first let’s do a quick dive into the latest headlines, starting with Weibo’s head-of-the-class first-quarter results. The bottom line with these results really is the bottom line of the report, which saw the company’s profit rise more than 6-fold to $46.9 million. (company announcement) It’s also worth noting the revenue rose by a far more modest but still strong 67 percent to about $200 million, which shows how the company is finally gaining economies of scale.

It almost goes without saying that any results from Weibo these days will pump up the company’s stock price, but even I was a bit surprised by the 25 percent rise in its shares after the results came out. That means Weibo stock now trades at a price-to-earnings (PE) ratio of 164, and has a market value of $17 billion, making it China’s sixth most valuable internet company, by my estimation.

That raises the question of whether Weibo shares are a bit pricey right now, which feeds back into my earlier question of whether this particular industry has legs. I would venture the answer to the first question is that Weibo shares may be a bit overvalued right now, following their tripling over the last year. As to the legs issue, I’ll jump the gun a bit and say this particular trend looks a bit fad-ish, since the live broadcasting format will inevitably be replaced by something else as technology improves.

Toutiao Beefs up Short Video

That means there’s probably lots of money to be lost in the next two years, which leads us nicely into the next two news items. The larger of the two has media reporting that Toutiao, operator of a popular news app, will pump 1 billion yuan ($145 million) into subsidies for its unit that lets users create their own short video and post them to the internet. (Chinese article)

This particular trend is actually slightly different from the live broadcasting, as it’s short stories that aren’t necessarily broadcast live. Still, it does show the clamoring among companies to create video products, and also the consumer demand for such products, which I again would venture will be limited in duration due to rapidly changing technology.

The other news has YY saying its Huya live streaming unit has just raised $75 million from a group that includes financial giant Ping An, as well as some smaller investors like Engage Capital and Morningside. (company announcement) There’s not much else to say about this particular story, except that it shows how hot live streaming has become.

So where do we go from here? My best guess is that live streaming and the related short video sectors will see at least another year of strong growth, and suck up hundreds of millions of investor dollars in the process. We’re likely to see some of the big names like Tencent (HKEx: 700) and Alibaba (NYSE: BABA) make big acquisitions in the space as well, though ultimately both businesses are likely to crest in the next 2 years, and company values will fall sharply after that.

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