Weibo (WB 3.02%), commonly referred to as "China's Twitter (TWTR)", is now slightly more valuable than the original Twitter. At the time of this writing, Weibo's enterprise value has hit $10.9 billion, compared to Twitter's enterprise value of $10.1 billion.
That gap could even widen in the near future, since Weibo shares have soared nearly 200% over the past 12 months, while Twitter shares have plunged more than 40%. Let's discuss why Twitter fared so poorly, and whether or not its "Chinese clone" is now a better buy.
Weibo's mobile app. Image source: Google Play.
What Twitter did wrong...
Twitter's biggest weakness is its sluggish user growth. Its MAUs (monthly active users) rose just 3% annually to 317 million last quarter, compared to 11% growth in the prior year quarter. Revenue rose just 8%, representing its slowest annual growth rate since its IPO in late 2013. Analysts expect Twitter's revenue to rise just 15% this year, compared to 59% growth in 2015.
Most of Twitter's new advertising initiatives simply aren't working. Letting advertisers pay lower prices for specified desired interactions (clicks, replies, retweets, or favorites) didn't attract smaller businesses -- it merely encouraged its existing customers to pay less money for fewer ads. "Moments", which curated trending tweets and stories, also failed to attract more advertisers as rivals like Snapchat's Live Stories and Facebook's Instagram Stories rose to prominence. Twitter also failed to create a cohesive video ecosystem from its Periscope, Vine, and Twitter videos to attract more advertisers.
Twitter then tried to sell itself, which briefly lifted the stock, but those gains quickly evaporated as the potential suitors moved on. CEO Jack Dorsey also still serves as the CEO of payments company Square, which means that Twitter only has a part-time CEO leading its turnaround efforts. Lastly, Twitter remains deeply unprofitable on a GAAP basis due to its liberal use of stock-based compensation. Non-GAAP net income, however, rose 37% annually to $91.7 million last quarter.
What Weibo did right...
Weibo's MAUs grew 33% annually to 282 million last quarter, compared to 36% growth in the prior year quarter. If that growth trajectory continues, Weibo could have more users than Twitter within the next two quarters. Revenue rose 36%, compared to 39% growth in the year ago quarter. Analysts expect Weibo's revenue to rise 33% this year, compared to 43% growth in 2015.
Weibo, which is owned by online media giant Sina (SINA), is one of the top advertising platforms in China. Its advertising and marketing revenue surged 45% annually last quarter thanks to revenue from small and medium sized businesses almost doubling. Those businesses purchase display ads, interest-based ad campaigns, event-based ad campaigns, and promoted feeds across the networks. Weibo's new live streaming platform also allows viewers to buy virtual gifts (from Weibo) for their favorite broadcasters.
Weibo also removed its Twitter-like 140-character limit in January. Users can only see the first 140 characters of a post, but then click the link to expand it -- similar to how Facebook handles longer posts. This indicates that unlike Twitter, Weibo isn't afraid to evolve into a hybrid micro-blogging platform which blends together elements of Twitter and Facebook.
To top it all off, Weibo is actually profitable by both GAAP and non-GAAP metrics. Between the second quarters of 2015 and 2016, Weibo's GAAP net income rose from $4.2 million to $25.9 million, while its non-GAAP net income more than tripled from $10.9 million to $35.5 million.
Is it time to sell Twitter and buy Weibo?
These numbers clearly reveal why investors are dumping Twitter and flocking to Weibo. Weibo currently trades at 169 times earnings and 44 times forward earnings. Those numbers might look high relative to the industry average of 50 for internet information providers, but they're actually fairly reasonable since Weibo's non-GAAP earnings are expected to more than double this year.
Weibo looks like a solid growth play, but it still faces plenty of headwinds. Tencent's WeChat, the top monolithic messaging platform in China, could hurt Weibo's relevance with its expanding ecosystem of online-to-offline (O2O) services. Meanwhile, Chinese censors could abruptly shut down the site, as they previously threatened to do, if Weibo doesn't "properly" self-censor posts on banned topics.
I believe that Weibo is a better investment than Twitter, but it could still face plenty of turbulence ahead.
