Chinese tech giant SINA (NASDAQ:SINA) has rallied nearly 50% this year, fueled by the growth of Weibo (NASDAQ:WB) and its own online portals. SINA retained a major stake in Weibo -- frequently referred to as "China's Twitter" -- after it was spun off as a separate publicly traded company in 2014.
SINA's headline numbers look solid. Its revenue rose 17% last year, and analysts expect 41% growth this year on Weibo's renewed growth. Its non-GAAP earnings jumped 62% in 2016, and Wall Street expects 84% earnings growth this year.
Those figures make SINA look like an undervalued growth stock at 28 times earnings, which is much lower than Weibo's P/E of 119 and the industry average of 38 for internet information providers. That's why I personally own shares of SINA, and why I recently told investors to "get greedy" with the stock.
However, investors should also be aware of the long-term risks SINA faces. Let's examine the top four challenges which could throttle SINA's growth in the near future.
1. Its reduced stake in Weibo
When SINA initially spun off Weibo, it retained a majority stake in the company that surpassed 50%. However, subsequent share distributions reduced that stake, with the most recent round reducing SINA's stake from 49% to 46%.
SINA still retains 72% voting power in Weibo after the distribution, but it reduces the overall weight of Weibo's faster-growing business on its top and bottom lines. If SINA continues to reduce its exposure to Weibo, the former could become a less appealing growth play than the latter.
2. Competition from Tencent
SINA, Weibo, and e-commerce giant Alibaba's ecosystems all overlap. SINA's news feeds appear in Weibo's app, Alibaba's mobile payment and e-commerce features are integrated into Weibo, and Alibaba remains Weibo's second-largest shareholder with a stake of over 30%.
Those partnerships were all forged to counter Tencent (NASDAQOTH:TCEHY), the Chinese tech giant that owns the popular messaging apps WeChat and QQ, the social network Qzone, and a portfolio of blockbuster games including League of Legends and Clash of Clans.
Over the past few years, Tencent has turned WeChat -- which hit 938 million monthly active users (MAUs) last quarter -- into a monolithic platform which offers ride hailing services, bookings and reservations, deliveries, mobile payments, social games, and various other features. Since all those tasks can all be accomplished without leaving the app, it represents a major threat to SINA's online portals, Weibo's social network, and even Alibaba's e-commerce sites.
3. Competition from Baidu
Tencent's growth also forced Baidu (NASDAQ:BIDU), the biggest search engine in China, to add its own O2O (online-to-offline) features -- like delivery services, ride hailing apps, and mobile payment features -- to its core search app.
Those investments took a bite out of its bottom line in recent quarters, but they could help Baidu leverage its leading search position to challenge Tencent, which leads the mobile messaging market. But as the battle between Baidu and Tencent heats up, smaller players like SINA and Weibo could see their users and advertisers being pulled toward those larger ecosystems.
4. The threat of government intervention
Chinese internet companies constantly face the risk of government regulators wrecking their businesses. Back in 2015, Chinese regulators threatened to shut down SINA's new portals, alleging that they "distorted news facts, violated morality, and engaged in media hype."
SINA appeased regulators with tighter controls over its stories, but the company was reprimanded again last year for publishing "vile" stories which had not been approved by state censors. The growing use of live streaming apps -- which Weibo heavily relies on -- was also targeted in a crackdown this year for becoming a hotbed of "vulgarity" and illegal activities.
If the government passes new restrictions against SINA, Weibo, and other internet companies, their growth could grind to a halt. They would also likely need to hike their operating expenses to upgrade their filters or hire more people to police their content.
The key takeaways
I'm bullish on SINA's long-term prospects, but I'm not ignorant of the risks. The stock is fundamentally cheap with rosy growth potential, but the company still needs to widen its moat against Tencent and Baidu and pacify government regulators. It it can pull off that tough balancing act, I believe that SINA could still have plenty of room to run.