Should Investors Cheer SINA's $500 Million Buyback?

SINA's (SINA) stock recently rallied after the Chinese tech company announced a new $500 million buyback plan for the next 12 months, which replaces its previous $500 million buyback plan for 2019.

$500 million equals about 17% of SINA's current market cap, which could give the stock a big boost if it's fully executed. However, investors should note that SINA only spent $82.1 million of its prior authorization to buy back 2.2 million shares last year.

Image source: Getty Images.

SINA's stock also declined about 20% over the past 12 months alone, due to its decelerating growth and concerns about the Chinese economy. So should investors be so eager to cheer on SINA's new buyback plan?

An authorization isn't a promise

Investors shouldn't confuse buyback authorizations with actual buybacks. When a company authorizes a buyback, it merely sets aside money for potential buybacks -- it's not obligated to actually buy back any shares.

Furthermore, companies often use buybacks to offset the dilution of a stock from stock-based compensation (SBC) plans for employees. SINA paid out $89.9 million, or 6% of its total revenue, on SBC expenses in the first nine months of 2019 -- which is comparable to the $82.1 million in buybacks it executed throughout the year.

Meanwhile, its total number of outstanding shares declined 4% annually in the first nine months. Therefore, if SINA didn't repurchase any shares in 2019, its SBC plans would likely have boosted its total share count.

These facts indicate that SINA's new buyback plan isn't aimed at boosting shareholder value or tightening up its valuations. Therefore, I'd be surprised if SINA spends anywhere close to $500 million on buybacks in 2020.

SINA should focus on its other problems

Generally speaking, buybacks are ideal for mature, stable companies that can't find other practical uses for their free cash flows. SINA is a mature tech company, but its core business is unstable, due to its overwhelming dependence on Weibo's (WB 4.92%) ad revenue.

SINA spun off Weibo, its higher-growth social networking platform, in an IPO in 2014. However, it still generates most of its revenue from Weibo, and retains a majority voting stake in the company. SINA and Weibo's revenue growth decelerated significantly over the past year:

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

That slowdown was caused by two main headwinds. First, Chinese companies reined in their advertising spending as the Chinese economy grew at its slowest pace in nearly three decades.

Second, both platforms faced stiff competition from other advertising platforms like Baidu, Tencent's WeChat, ByteDance's Toutiao and TikTok, and Bilibili. ByteDance and Bilibili, which both cater to younger Gen Z users, generated much stronger ad growth than their older tech rivals.

Image source: Getty Images.

Instead of allocating $500 million to buybacks, SINA should consider investing in the expansion of its core portals and apps to reduce its dependence on Weibo. So far, SINA's only major expansion of its core business is its finance platform, which is struggling due to tighter government regulations of the fintech market.

Instead of focusing on fintech, SINA could acquire promising apps in higher-growth markets like short videos, online dating, and games, which would mirror the moves of faster-growing tech companies like Tencent and Momo.

The key takeaways

SINA's $500 million buyback sounds impressive, but I suspect that it's sound and fury which signifies nothing. SINA likely announced such a high figure to avoid another activist battle -- like its clash with Aristeia Capital, which demanded that it back more shares in 2017 -- and to offset the dilution from its SBC expenses. Therefore, investors should ignore this announcement and wait for more visible improvements in SINA's core business.