Chinese internet companies SINA (SINA +0.00%) and Weibo (WB +0.00%) are closely tied to each other. SINA holds a 46% stake in Weibo, deriving 72% of its top line from the Chinese Twitter clone (as Weibo is referred to by some). Not surprisingly, both companies have been stock market darlings over the past year as the growing craze for Weibo's microblogging platform has led to terrific revenue growth for both companies. In fact, these Chinese internet stocks have beaten the NASDAQ 100 Technology Sector hands-down in recent months.
Weibo's greater gains have made it more expensive with a trailing price-to-earnings (P/E) ratio of 132 as compared to SINA's 30. The rich valuation, however, might seem deserved given Weibo's superior earnings growth rate. But is it a prudent idea for investors to stick to Weibo when they could tap its growth through SINA given the latter's stake in the company? Let's take a look.
Image Source: Getty Images
A look at SINA
SINA relies on Weibo for 70% of its revenue, which means that investors can still enjoy the latter's rapid growth via a stock with a lower valuation. Additionally, SINA's non-Weibo business has started gaining some traction of late, with the company witnessing 8% year-over-year growth from this segment in the latest quarter.
Though this pales in comparison to the massive growth delivered by Weibo, it is nevertheless a step in the direction of diversification. Last quarter, Weibo's monthly active user growth fell below 30% for the first time since it made its debut on the stock market in 2014 and this has some investors worried.
While there is no denying that Weibo's growth is still impressive -- as the 28% year-over-year jump in its monthly active users boosted its advertising revenue by 72% last quarter -- at the same time, there will be a limit to the company's growth given its negligible presence outside China and the competition from the likes of Tencent's (TCEHY 1.12%) WeChat.
Therefore, as the fight for advertisement dollars in China intensifies, SINA will have to look for avenues to diversify its revenue stream. As such, it is not surprising to see the Chinese internet specialist is now looking to move into new areas such as online micro finance. SINA has set up a $500 million fund to advance loans to online finance companies after its pilot project on its own portal delivered encouraging results.
But SINA could run into roadblocks in this new venture given the stiff competition from WeChat, which has been offering personal loans for the past couple of years. Meanwhile, the high rate of defaults and fraud in the peer-to-peer lending sector in China could force the government to tightly regulate the sector, hurting SINA's growth opportunity.
A look at Weibo
Unlike SINA, Weibo is a pure-play social media company. Dubbed China's Twitter, the stock's growth has been rapid thanks to the terrific growth in its user base, which has, in turn, enhanced its advertising revenue.
The social media specialist has found a smart way to tap China's smartphone penetration by strategically tying up with domestic smartphone OEMs (original equipment manufacturers). More specifically, Weibo has been collaborating with domestic smartphone companies in China to optimize its app for greater efficiency, lower storage and battery consumption, and faster response times. The social media specialist works with the smartphone companies at the product level to integrate its app into their devices.
The strategy is bearing fruit for Weibo as its monthly active user growth from Chinese smartphone users jumped 74% year over year in June. More importantly, the company's tie-ups should continue delivering results in the long run as only 53% of mobile phone users in China currently use a smartphone, according to eMarketer's estimates, leaving a lot of room for growth.
But at the same time, investors shouldn't be oblivious to the fact that Weibo's business could be hurt by political regulations in China. Back in June, the Chinese government banned video and audio streaming on Weibo in order to tighten its control over what content goes online. The company will now block political content from unlicensed outlets and instead promote state-backed ideas. Such interference by the government could restrict Weibo's advertising growth due to lack of content diversity.
Meanwhile, Weibo investors should also keep in mind that its rapidly growing user base faces a big challenge from Tencent's WeChat. As it stands, WeChat has more monthly active user,s at around 940 million, who spend more time on the platform as compared to Weibo.
Tencent's smart strategy of building an ecosystem around WeChat has reaped rich dividends for the company in the form of strong user engagement.
The verdict
SINA is the more diversified choice of these two stocks. Its substantial stake in Weibo means that investors can take advantage of the latter's fast growth, while at the same time, they can also benefit from SINA's efforts to diversify. But more importantly, SINA stock is cheaper than Weibo's, making it the more prudent bet for investors who are looking to profit from China's internet boom.
