SINA (SINA) and its social media platform Weibo (WB -4.06%) have both lost about 40% of their value over the past 12 months on concerns about their sluggish growth, the trade war, and the economic slowdown in China.

However, both stocks recently rallied sharply after their second-quarter numbers topped analysts' expectations. Do those green shoots indicate that the two beaten-down Chinese tech stocks are finally ready to rebound?

A confused investor looks at a wall of stock tickers..

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The key problems

SINA spun off Weibo in an IPO in 2014, but it retains a majority voting stake in the company and still generates most of its revenue from the social media platform. Both companies' growth decelerated significantly over the past year.

YOY revenue growth

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

SINA

50%

26%

14%

8%

(1%)

Weibo

68%

44%

28%

14%

1%

YOY = Year-over-year. Source: Quarterly reports.

That slowdown occurred because SINA and Weibo generate most of their revenue from ads. The economic slowdown in China torpedoed companies' marketing budgets, while tough competitors in the space -- including heavyweights like Baidu (BIDU -3.94%), Tencent (TCEHY -2.78%), and ByteDance -- exacerbated the pain.

SINA didn't offer any guidance, but Weibo expects its revenue to rise 6%-9% annually on a constant currency basis in the third quarter (compared to 7% constant currency growth in the second quarter), which suggests that its core business is finally stabilizing.

Diversification beyond ads

SINA and Weibo are both diversifying their businesses away from ads. SINA is expanding its fintech business, while Weibo is expanding its live video streaming platform.

As a result, Weibo's core ad revenue stayed roughly flat annually during the second quarter, but its value-added service (VAS) revenue (mainly from its live video platform) rose 8% and accounted for 14% of its top line.

That growth, along with SINA's own fintech revenue, boosted SINA's non-advertising revenue -- which accounted for nearly a fifth of its top line -- 19% annually during the quarter. SINA's core advertising revenue, which includes Weibo's ads, fell 5%, mainly due to weak demand for ads on its older news portal sites, which face tough competition from popular news aggregator apps like ByteDance's Toutiao, Tencent News, and Tencent-backed Qutoutiao.

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Image source: Getty Images.

The main pillars of growth

SINA and Weibo's shared pillar of growth is still Weibo's main social platform. 81% of SINA's revenue still comes from Weibo, which grew its monthly active users (MAUs) 13% annually to 486 million in June. Mobile users accounted for 94% of those MAUs.

Weibo's daily active users (DAUs) also grew 11% to 211 million in June, indicating that it wasn't succumbing to pressure from other major social platforms like Tencent's WeChat and QQ. Weibo's consistent growth can be attributed to its popularity among celebrities, influencers, and brands, along with the integration of new live video features that let those top-tier users build bigger followings.

Like other live video platforms, Weibo monetizes its video streams by letting viewers buy virtual gifts for their favorite broadcasters. Weibo splits that revenue with the broadcasters.

SINA's other pillar of growth is its fintech business, which offers microloans and digital banking services. This business got off to a rough start due to defaults across the market and a government crackdown on online lenders, but the business seemed to stabilize in the first half of 2019.

During the conference call, SINA CEO Charles Chao stated that bad debts remained "a pretty low percentage" of the platform's loans, that it maintained "stringent rules" for admitting borrowers, and that it remained "very cautious" regarding regulatory policies. The unit's long-term growth could gradually reduce SINA's dependence on Weibo and offset the ongoing declines at its portal business.

Margins are gradually improving

SINA and Weibo are both struggling with slower revenue growth, and their gross margins fell year-over-year. However, those gross margins also improved sequentially, indicating that the companies still enjoy significant pricing power in ads, live videos, and fintech services.

Gross margin

Q2 2018

Q1 2019

Q2 2019

SINA (Portal only)

58%

53%

55%

Weibo

86%

79%

81%

SINA (Total)

80%

76%

77%

Source: SINA Q2 report.

Those improving margins, along with Weibo's stabilizing growth, indicate that brighter days could be ahead for SINA and Weibo. Both stocks also trade at historically cheap levels after their year-long declines -- SINA trades at just 15 times forward earnings, while Weibo has a forward P/E of 13.

Neither company is generating impressive earnings growth yet -- SINA's adjusted net income fell 11% during the second quarter, and Weibo's adjusted net income stayed flat. However, both companies' earnings growth could improve over the next few quarters if macro headwinds wane, easing the pressure on their ad businesses, and their fintech and live video businesses continue growing.

I'm not calling a bottom on SINA and Weibo yet, but I think it makes more sense to buy or hold these stocks at these levels instead of selling them.