Chinese Internet portal SINA Corp. (SINA) has had a rough year. Its stock has plunged roughly 55% since the beginning of 2014, due to a government crackdown and intense competition from Baidu (BIDU 0.64%) and Tencent (TCEHY 2.21%).
Source: Ycharts.
In April, SINA spun off Weibo (WB 4.21%), its micro-blogging platform, in a closely watched IPO. The move generated fresh capital for SINA, but left investors uncertain about the company's long-term outlook. Looking ahead, can SINA bounce back next year, or will it slip even lower?
A tale of two businesses
SINA's revenue comes from its portal sites and Weibo, in which it retained a 57% post-IPO stake. Last quarter, SINA's revenue rose 8% year-over-year to $198.6 million. Advertising revenues climbed 10% to $166.9 million. The remainder came from non-advertising services like value-added services (VAS).
However, Weibo's ad revenue rose $21.7 million as portal ad revenue declined by $6.5 million. Weibo's VAS also grew by $9.1 million, but mobile VAS (from SINA's mobile portal) dropped by $7.4 million. This is a mixed blessing for SINA, since Weibo's VAS has higher margins than SINA's mobile VAS, but it shows that the two businesses are headed in opposite directions. That leads to an obvious question -- why invest in SINA when you can simply buy Weibo shares instead? That's likely why shares of SINA fell 18% as shares of Weibo remained flat over the past six months.
Meanwhile, SINA's operating expenses surged 43% year-over-year to $135.7 million. That resulted in an operating loss of $10.9 million, down from operating income of $23.2 million in the prior year quarter.
One David, two Goliaths
As expenses rise, SINA will have less marketing firepower to fight back against Baidu and Tencent.
Baidu, which controls over 80% of China's search engine market, is a more popular destination than SINA's portal sites. Meanwhile, Tencent's rival Weibo platform hit 540 million registered users and 87 million daily active users in 2012, exceeding SINA Weibo's 503 million registered and 46.2 million daily active users.
Yet at that apex, Tencent noticed a decline in microblogging and the rise of mobile messaging apps. By the end of 2013, China Internet Network Information Center (CNNIC) reported that active users on microblogging sites fell 9% year-over-year. Tencent focused on strengthening WeChat, its mobile messaging service, and integrated the remnants of Weibo into its news division. WeChat users spiked from 194 million at the beginning of 2013 to 468 million in the third quarter of 2014.
At the beginning of 2014, CNNIC reported that 37% of all users who abandoned SINA Weibo had started using WeChat. SINA, realizing that WeChat was a major threat, recently purged all promotional posts about WeChat from Weibo.
SINA's Ministry of Truth
Speaking of self-censorship, one of SINA's main operating expenses has been its network of censors, who are responsible for raising or docking a user's "credit score". When a user's credit score gets too low, due to posting "harmful information," pornography, or spam, the account gets banned.
These censors are necessary, since the Chinese government came down hard on SINA in April in response to pornographic content posted on its sites. That crackdown resulted in a temporary revocation of two of SINA's licenses and bans on covering certain content. SINA stock plunged 15% after that announcement.
With Weibo now spun off into a separate company, SINA is arguably less exposed to these probes. However, any hit that Weibo takes will drag down SINA as well, due to its majority ownership, which means SINA could eventually sell more of its Weibo shares. But if SINA's ownership of Weibo shrinks, the company will simply be left with a weak portal site with declining ad revenues.
SINA's four main sites. Source: SINA.
The verdict
Even after being cut in half over the past year, SINA stock remains pricey at 41 times forward earnings. Baidu, which rallied 38% in 2014, only trades at 28 times forward earnings. SINA's flat, trailing 12 month operating margin also looks anemic compared to Baidu's 28%.
The only glimmer of hope for SINA is its $2.3 billion in cash and equivalents, which was boosted by the Weibo IPO. But the company's management hasn't offered clear plans on how to deploy that cash to grow its business. The next logical step would be gaming, since that's where Sohu and Netease -- which both host popular portal sites -- now generate most of their revenue. But Tencent, which acquired League of Legends maker Riot Games in 2011, also looms large in that industry.
It's hard to see SINA going anywhere in 2015. Its high valuation, slim margins, slumping ad revenue, and the threat of more government crackdowns on both SINA and Weibo are all red flags telling investors to avoid this stock.
