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Why Did the Bears Pounce on Weibo and SINA?

By Leo Sun - May 13, 2018 at 8:00AM

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Sometimes beating earnings estimates just isn’t enough.

Shares of Weibo (WB 1.23%) and its parent SINA (SINA) tumbled 14% and 10%, respectively, after posting their first quarter results on May 9. The sell-off was surprising, since both companies easily beat analyst expectations.

Weibo's revenue rose 76% annually to $349.9 million, topping estimates by $7.4 million. SINA's revenue, mainly supported by Weibo, rose 59% to $440.8 million, also beating expectations by $7.4 million.

Weibo's mobile app.

Weibo's mobile app. Image source: Google Play.

On the bottom line, Weibo's non-GAAP net income soared 95% to $112.6 million, or $0.50 per share, which topped expectations by three cents. SINA's non-GAAP net income dipped 6% to $35.2 million, or $0.47 per share, but still cleared estimates by five cents.

Those numbers looked solid, so why did both stocks get crushed? Let's take a closer look at their earnings reports to find out.

First, the good news...

Weibo's monthly active users (MAUs) rose 21% annually to 411 million, with mobile MAUs accounting for 93% of that total. Its daily active users (DAUs) grew 19% to 184 million.

That growth lifted its ad and marketing revenues by 79% annually to $302.9 million, while its value-added service revenues climbed 57% to $46.9 million. These are growth numbers many social networking companies would kill for.

79% of SINA's revenue came from Weibo during the quarter. The rest came from its older portal business and its newer fintech unit. SINA's portal revenues rose 14% annually to $90.9 million during the quarter, fueled by 7% growth in its advertising revenues and a 33% jump in its "other" revenues, mostly from its fintech business. 77% of SINA's portal ad revenues also came from its mobile app, up from just 53% a year ago, fueled by higher DAUs at its news and finance apps.

SINA's mobile app.

SINA's mobile app. Image source: Google Play.

SINA's gross margin also rose six percentage points annually to 75%. Its portal gross margin remained unchanged at 50%, as Weibo's gross margin expanded from 77% to 82%.

Both stocks are now trading at surprisingly reasonable valuations after their latest pullbacks. Weibo trades at just 39 times this year's earnings, while SINA trades at 27 times this year's earnings. Investors should recall that SINA owns 46% of Weibo's shares and a 72% voting stake, so it might be a cheaper way to invest in Weibo than Weibo itself.

Now, the bad news...

However, high-growth companies often need to spend money to make money. Weibo's total non-GAAP costs and expenses jumped 73% annually to $229.3 million. Weibo attributes that jump to higher marketing expenses, exacerbated by a shift to the ASC 606 accounting standard.

Meanwhile, SINA's non-GAAP operating expenses jumped 86% annually to $237.3 million. SINA attributes those higher expenses to more aggressive marketing campaigns, the costs of acquiring users for Weibo and SINA's news app, and higher personnel costs.

Weibo's guidance for $420-$430 million in revenues for the second quarter, which would represent 66%-70% year-over-year growth, also merely matched Wall Street's estimate for 67% growth instead of exceeding it.

That sounds like a minor issue, but some investors were likely looking for a higher figure, especially since Weibo posted 70% to 80% growth over the past four quarters. That guidance also dragged down shares of SINA, which didn't provide guidance for the current quarter.

However, it should be noted that Weibo's guidance is provided under the ASC 606 standard, which slightly weakens year-over-year comparisons.

Other headwinds

Some investors might be concerned about other headwinds, like tighter regulations and tougher competition. In recent years, Chinese regulators repeatedly cracked down on Weibo and SINA over their alleged roles in spreading "harmful" content. Those moves forced both companies to hire more censors -- resulting in its higher personnel costs.

Both companies also remain vulnerable to Tencent's expansion of WeChat, the top messaging app in China, into a monolithic "super app" for social networking, news, and various online-to-offline services. They're also vulnerable to disruptive new players like news aggregator Toutiao.

Lastly, both stocks could be hammered on any future trade clashes between the US and China, although their core businesses are well-insulated from any tariffs or IP concerns.

So is this a buying opportunity?

I personally own shares of SINA, and this looks like a classic opportunity to buy the dip in both companies. Both stocks are undervalued relative to their growth potential, and they have plenty of room to expand their user bases and advertising businesses.

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