Is Weibo Running Out of Steam or Taking a Breather?

Could this rocket ship stock come crashing back down to earth?

Leo Sun
Leo Sun
Jun 29, 2017 at 11:00AM
Technology and Telecom

Shares of Weibo (NASDAQ:WB) surged nearly 160% over the past 12 months, as the Chinese social network repeatedly crushed analyst estimates with double-digit sales growth and triple-digit profit growth. However, the stock seemingly peaked at just above $80 in late May, and slid back to the high $60s.

Has Weibo finally run out of steam, or is it merely taking a breather? Let's take a closer look at the key issues facing "China's Twitter" to find out.

A runner rests after running.

Image source: Getty Images.

Its high valuation

Weibo's biggest weakness is its valuation. The stock trades at 109 times earnings, which is far above the average P/E of 37 for internet information providers. Its price-to-sales ratio of 22 is also much higher than the industry average of 6.5.

Weibo's forward P/E of 53 is lower than its projected earnings growth rate of 84% this year, but it remains higher than the industry average. This means that Weibo could fall very quickly during a market downturn.

I previously owned Weibo, but I recently sold my shares and bought SINA (NASDAQ:SINA) -- which owns a majority voting stake in Weibo -- instead. The reason is simple -- SINA generates most of its revenue from Weibo but it still trades at just 26 times earnings, making it a safer way to profit from Weibo's growth.

The recent crackdown on streaming video

When a stock trades at premium valuations, an unexpected headwind -- like a government crackdown -- can cause the stock to tumble. That's what recently happened after Chinese regulators abruptly ordered Weibo, Phoenix New Media's iFeng, and AcFun to stop streaming video and audio content.

The government claims that the streams weren't properly licensed to broadcast news-related content, and that they propagated "negative speech." That was a troubling development, since video content generated 18% of Weibo's advertising revenues last quarter. It also leaves Weibo vulnerable to competitors like Tencent (NASDAQOTH:TCEHY) and Momo (NASDAQ:MOMO), which were both previously granted video broadcasting licenses by the government.

However, Weibo disclosed that regulators are only demanding stricter management of "programmed categories" like news stories, ads, and political videos; while "non-programmed" user-generated content would be left alone. This conflict should be temporary, since even the state-backed CCTV broadcasts videos on Weibo, but it will cast a dark cloud over the company until it's resolved.

Live streaming video could be next

User-generated live videos are becoming increasingly important to Weibo, because they allow viewers to buy virtual gifts for their favorite broadcasters. The proceeds from those gifts are then split between Weibo and the broadcasters. Momo uses the same high-margin business model.

Weibo's mobile app.

Weibo's mobile app. Source: Google Play.

Investors might be breathing a sigh of relief regarding the government's decision to leave "non-programmed" live videos alone, but that respite could be short-lived. That's because the government was already cracking down on live videos over the past year.

Last April, live video companies were required to have broadcasters register their real names and government-issued ID numbers, add watermarks to their videos, and monitor content around the clock. Last September, the government required companies to apply for the aforementioned license to continue live broadcasts. By the end of the year, thousands of accounts and programs were shuttered across China's top live-streaming sites.

Therefore, live videos on Weibo, Momo, and other platforms could still be removed on a case-by-case basis. This raises troubling questions about the long-term viability of user-generated live videos.

SINA sends mixed signals

Lastly, SINA has gradually reduced its stake in Weibo ever since the latter's IPO in April 2014. SINA did this via share distributions, which reduced its ownership stake from 56% after the IPO to 46% (with a 72% voting stake) after the latest round completes in July.

This sends mixed signals about Weibo's future. On one hand, SINA is giving its investors extra shares of Weibo to offset the performance and valuation gap between the two companies. SINA's 70% rally over the past 12 months was impressive, but Weibo more than doubled that gain. Giving its investors shares of Weibo could also offset the lackluster growth of SINA's older portal business, which posted just 1% annual sales growth last quarter.

On the other hand, backing away from SINA might allow Alibaba (NYSE:BABA), Weibo's second largest shareholder, to either boost its stake or execute a long-rumored buyout of either SINA or Weibo.

So is Weibo running out of steam?

I personally think Weibo's growth story remains intact, but its valuations are too rich and it faces too many near-term headwinds. Therefore, the stock's not really running out of steam, but it might need to take a very long breather. For now, investors who want safer exposure to Weibo should probably stick with SINA or Alibaba instead.