Is SINA's Weibo in Danger?

Learn why shares of SINA fell almost 10% last week, even after the Chinese Internet company reported slightly better-than-expected fourth-quarter figures.

Mar 3, 2014 at 8:00PM

Chinese Internet company SINA (NASDAQ:SINA), which owns microblogging platform Weibo, announced strong results for the fourth quarter of 2013. Net revenue increased 42%, year over year, to $197 million, triggered by advertising revenue that grew 45% over the prior year.

These figures were slightly ahead of analysts' estimates. However, the company experienced a significant sell-off after the earnings call, as it also reported the slowest user growth ever for Weibo. The platform saw a 4.2% sequential user increase in the most recent quarter, which suggests SINA may be losing users to competitors, such as Tencent's (NASDAQOTH:TCEHY) WeChat. Is Weibo in danger?

Losing users?
According to the company's latest official user metrics, Weibo is still growing, although not at the same rate it used to. Concerns regarding Weibo's growth rate intensified after a report by China Internet Network Information Center was released on Jan. 2014. According to the report, the microblog's user base fell 9%, from 309 million the year before, to 281 million.

The slowdown in Weibo's growth story could be related to the emergence of instant messaging app WeChat as the most popular social network in China, as roughly 37% of users who stopped using Weibo began using WeChat, according to the same report. Between the first and third quarter of 2013, WeChat experienced an amazing 1,201% increase in usage among youths, according to a study by Global Web Index.

A shift to earnings
The good news is that even though it may become increasingly difficult for Weibo to continue growing its user base, the company still has plenty of room left for revenue growth. The company could offset the current slowdown in user growth with a stronger monetization approach. Note that in the fourth quarter of 2013, Weibo posted an operating profit of $3 million for the first time, the biggest in the company's history.

Weibo, which started monetization just two years ago, currently generates most of its revenue from display ads and sponsored posts. This could change as Weibo continues its efforts to increase revenue from games and membership fees.

Likewise, the partnership with Alibaba, which owns an 18% stake in Weibo, is expected to bring the two companies closer in areas of online payments, user account connectivity, and data exchange. In terms of top line, SINA expects roughly $380 million in additional revenue from this partnership over the 2013-2015 period, as several online merchants in Alibaba are already shifting online marketing budgets to Weibo.

Even if the high-growth story of Weibo is coming to an end, the company is still at a very early stage in terms of monetization. As the second-largest social network in China, SINA could use the enormous popularity of Weibo to create and successfully release new services, building an ecosystem surrounding the Weibo brand.

Weibo's IPO
The potential initial public offering of Weibo could unlock value. According to FT.com, Weibo may be heading for a stock market listing in New York, motivated by the market's strong appetite for messaging services. Weibo may be targeting a valuation of up to $8 billion, well above the entire market capitalization of SINA, which is worth less than $5 billion. Naturally, the deal is set to become a major catalyst for SINA, which owns 71% of Weibo. It will also be beneficial to Alibaba, which is allowed to acquire up to 30% of Weibo for an unspecified price.

Final Foolish takeaway
Shares of SINA have underperformed after the company reported that its microblogging platform Weibo saw only a 4.2% sequential user increase in the latest quarter. Moreover, due to fierce competition from players like Tencent's WeChat, it will be increasingly difficult for Weibo to continue growing at the same pace as it had been.

That being said, Weibo is far from the danger zone. The app is still at an early stage in terms of monetization, and a strong partnership with e-commerce giant Alibaba is set to generate millions in additional revenue. Eventually, the company could go public, unlocking shareholder value.

Social media for the long term
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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Sina. The Motley Fool owns shares of Sina. 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.

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