The Chinese web industry is full of growth stories. However, finding an undervalued company with strong competitive advantages is the real challenge. Serving more than half a million advertisers, Baidu (NASDAQ: BIDU ) was a great example before its amazing 70% six-month rally.
SINA (NASDAQ: SINA ) may be the next Baidu. Trading at 9.4 times sales, the market may be ignoring the potential of its microblogging platform, Weibo, which is set to become one of the best monetized social networks in Asia.
SINA owns a high-traffic portal site (sina.com) and Weibo. Since Weibo accounted for less than 15% of revenue in 2012, sina.com is the main revenue component. However, early monetization metrics suggest Weibo could be worth more in the future.
Weibo's amazing growth
Despite having more than 500 million accounts, Weibo keeps growing fast. It’s achieved 54 million daily active users in June, up 8.3% from March. Baidu, on the other hand, isn't growing much after obtaining 80% of the whole search queries market.
Bears like to point out the emergence of message application WeChat, provided by competitor Tencent (NASDAQOTH: TCEHY ) , which could be behind the recent deceleration in Weibo's monthly unique visitors growth.
Tencent, which also owns instant messaging service QQ, is not only gaining more users, but also making WeChat an international application, while SINA doesn't seem to be interested in attracting non-Chinese users. Consequently, Tencent's WeChat reached 300 million users early this year. This is no surprise. After all, Tencent succeeded in taking the user base of its QQ application to 850 million users.
However, by focusing only on China, Weibo is building a highly-engaged, easy-to-monetize user base, because Chinese users are particularly keen on smartphones, as suggested by Google's survey "Our Mobile Planet: China." Sixty percent of Chinese consumers would abandon their TV before their smartphone, versus 46% in the U.S. And unlike other regions, China's mobile Internet user base continues growing rapidly. In February, China passed the U.S. in daily smartphone activations .
Also notice that Tencent's services are not perfect substitutes for Weibo. Both QQ and WeChat have been designed to focus on a circle of friends. But, there will always be room for a service with a wider scope, like Weibo, which allows users to easily follow celebrities and gather information from across the country.
Finally, unlike SINA, Tencent is fighting on many fronts at the same time. More than half of its 2012 revenue came from the gaming industry. And just some weeks ago, it paid $448 million for part of China's third-largest search engine, sohu.com, in an attempt to compete against Baidu. Getting involved in too many markets could lead to a loss of focus and specialization, which is fundamental for being consistently profitable in the IT industry. Luckily, the company has five times more assets than liabilities.
Early signs of strong monetization
SINA has been experimenting with various monetization models since early 2012, and the company may be getting closer to the right answer.
According to China Internet Watch, Coca-Cola used Weibo and Weibo Wallet to promote its 20 yuan customized bottles. Celebrities showed off their customized bottles, making the product go viral in a matter of hours. The results were impressive. In the first day, 300 bottles sold out in one hour. On the fourth day, the same number of bottles sold out in one minute.
Although celebrity power may have helped Coca Cola, Weibo played a fundamental role in creating virality. Another example of Weibo's power is the campaign run by BMW to promote its Z4 vehicle in China. The company created a marketing campaign called "Control Z." Less than 24 hours after the campaign started, more than 300,000 Weibo users had published comments using the "Control Z" hashtag.
Such stories show Weibo can make products go viral in the second-largest economy. However, because Weibo's monetization started late, the app only recorded $66 million in revenue last year, less than 6% of what Baidu made in the latest quarter. The introduction of Weibo Wallet and Weibo Premium, the partnership with Alibaba to promote Taobao products using a $380 million marketing budget for the next three years, and the increase in advertisers should take Weibo's revenue to a new record.
Final Foolish thoughts
Baidu, which controls 70% of paid search dollars spent in China, may still have upside potential, because the company keeps investing in strategic assets -- like its latest $160 million investment in Groupon-like deal-a-day giant Nuomi.com -- and just added over 58,000 new online customers in the second quarter. However, Baidu's current market valuation isn't an interesting entry point. The market is well aware of Baidu's growth potential.
On the other hand, despite having the right assets to grow its revenue significantly over the next decade, SINA remains undervalued and unknown, a situation similar to what Baidu experienced in the past. Such situations are hard to find and it won't be long until investors realize the real value of Weibo.
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