Are Investors Too Bearish on SINA and Weibo?

SINA (SINA) and its social media platform Weibo (WB 4.92%) both shed nearly 20% of their market value after posting their third-quarter reports on Nov. 14. SINA spun off Weibo in an IPO in 2014, but it still retains a majority voting stake in Weibo, and generates most of its revenue from the company.

SINA's revenue rose 1% annually to $561.4 million during the quarter. On a non-GAAP basis, its revenue rose 1% (5% in constant currency terms) to $558.8 million and beat estimates by about $1 million. Its non-GAAP EPS rose 1% to $0.94 and beat expectations by $0.22.

Image source: Getty Images.

Weibo's revenue (which also accounts for 83% of SINA's GAAP revenue) rose 2% annually (6% in constant currency terms) to $467.8 million, but missed estimates by $4 million. However, its non-GAAP EPS still rose 3% to $0.77 and beat expectations by four cents.

SINA and Weibo's headline numbers looked decent, so why did their stocks post such massive post-earnings drops? Let's dig deeper to find out.

Understanding the predicament

Weibo generated 88% of its revenue from online ads during the quarter, and that revenue rose 1%. SINA generates most of its ad revenue from Weibo's ad business, but a smaller portion comes from its own portal sites. SINA's total ad revenue fell 5% annually as its declining portal ad revenue offset Weibo's modest growth.

Like many other digital ad platforms in China, Weibo and SINA are struggling to sell ads as the sluggish Chinese economy forces companies to cut their marketing budgets. Competition from rival platforms like Tencent's (TCEHY 3.23%) WeChat, Baidu (BIDU 0.98%), and ByteDance's Toutiao and TikTok are exacerbating that pain. Those headwinds caused both companies' revenue growth to grind to a halt over the past year:

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

To counter that trend, Weibo and SINA are diversifying their core businesses away from digital ads. Weibo beefed up its VAS (value-added services) unit by acquiring a live video streaming platform at the end of 2018. As a result, its VAS revenue -- which accounted for the remaining 12% of its top line -- rose 9% annually.

Weibo's live streaming business accounts for a large portion of SINA's "non-advertising" business, which also includes a smaller fintech division. Revenue from that unit, which accounted for 17% of SINA's non-GAAP revenue, rose 38% annually on the combined strength of Weibo's live streaming unit and its own fintech services.

Image source: Getty Images.

Looking for a cyclical bottom

At first glance, Weibo and SINA's revenue growth seemingly bottomed out in the second quarter.

However, Weibo expects its revenue to only rise 0%-3% annually in constant currency terms in the fourth quarter, which suggests that its reported growth will turn negative again -- unless the Chinese yuan rises significantly against the U.S. dollar.

SINA didn't offer any guidance for the fourth quarter, but Weibo's dim outlook indicates that its reported revenue growth will also turn negative again in the fourth quarter. That's the main reason both stocks lost nearly a fifth of their market values in a single day.

Seeking a silver lining

Yet investors shouldn't overlook the silver lining. Weibo's monthly active users (MAUs) still grew 2% sequentially and 11% annually to 497 million, and its average daily active users (DAUs) also grew 2% sequentially and 11% annually to 216 million. Those steady growth rates indicate that it isn't being rendered obsolete by rivals like Toutiao, TikTok, or WeChat.

SINA's total gross margin contracted annually, but it expanded sequentially as Weibo's stronger margins offset the weaker margins of its portal unit (which also includes its fintech services). This indicates that it isn't sacrificing its margins to generate top-line growth.

Source: SINA quarterly reports.

Analysts expect SINA's revenue to rise just 2% this year, but accelerate to 9% growth next year. Its earnings are expected to drop 20% this year but rebound 15% next year. Those are decent growth rates for a stock that trades at less than 12 times forward earnings.

Weibo's revenue is expected to rise 5% this year and 11% next year, and its earnings could remain flat this year but rise 12% next year. Those are also solid growth rates compared to its forward P/E of 14.

Those growth rates might be too optimistic, though, and setbacks in the trade talks between the U.S. and China could still dampen hopes for stronger growth next year. But SINA and Weibo won't fade away anytime soon, and investors who accumulate shares down here could be well rewarded when the Chinese ad market finally recovers.