SINA (SINA +0.00%) and Weibo (WB 1.03%) both reported first-quarter numbers on Tuesday that beat analysts' expectations. Both Chinese tech stocks initially rallied, but subsequently gave up their gains as the broader market petered out.
SINA spun off Weibo in an IPO six years ago, but the Chinese internet company still generates most of its revenue from the social network. Weibo also still integrates SINA's portals into its own platform. In other words, the two companies remain joined at the hip.
Over the past three years, SINA's stock has plunged over 60% and Weibo's stock has tumbled over 50%. Both companies struggled with tougher competition in China's crowded advertising market, the Chinese economy's slowdown, censorship challenges, and the COVID-19 crisis.
Yet SINA and Weibo's latest numbers indicate an inflection point might be just around the corner. Could these two battered stocks, which are both trading at historically low valuations, rebound over the next few quarters?
Image source: Getty Images.
SINA is reducing its dependence on Weibo
SINA generated 74% of its revenue from Weibo during the first quarter. The rest came from its own media advertising and fintech businesses. SINA previously grew at a slower rate than Weibo due to the sluggish growth of its portal-based ads, but that balance shifted over the past two quarters:
|
Revenue Growth (YOY) |
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
|---|---|---|---|---|---|
|
SINA |
8% |
(1%) |
1% |
4% |
(8%) |
|
|
14% |
1% |
2% |
(3%) |
(19%) |
YOY = Year-over-year. Source: Quarterly reports.
SINA offset the slowdown at Weibo and its own advertising business with the growth of its fintech business, which mainly provides microloan products.
During the first quarter, SINA's fintech revenue surged 134% annually and accounted for 19% of its top line, up from 7% a year earlier. That growth nearly offset a 22% drop at its own media advertising business and Weibo's 19% decline.
During the conference call, CFO Bonnie Zhang declared SINA would "take a measured approach to scale up" its microloan business by focusing on "minimal traffic cost, available institutional funding, and a sound credit control system."
China's financial regulators are currently encouraging companies to replace the troubled peer-to-peer lending industry -- which was plagued by predatory lending practices and defaults -- with company-backed microloans. SINA is clearly benefiting from that paradigm shift, but Weibo is being left out in the cold.
Weibo faces more challenges than SINA
Meanwhile, SINA and Weibo's advertising platforms face tough competition from rivals like Tencent's WeChat, Alibaba's paid listing marketplaces, and ByteDance's Gen Z-oriented platforms. The COVID-19 fallout and other macro headwinds are exacerbating the pain.
Image source: Getty Images.
Weibo generated 85% of its revenue from ads during the quarter. The rest came from its value-added service (VAS) business, which mainly relies on live video broadcasts.
Its VAS revenue fell 17% annually as its lower live streaming revenue (mainly from virtual gifts) offset higher premium membership revenue. That decline suggests Weibo is falling behind higher-growth live streaming companies like JOYY.
On the bright side, Weibo's monthly active users (MAUs) still grew 18% annually to 550 million, and its daily active users (DAUs) rose 19% to 241 million. Unfortunately, none of that user growth boosted its ad and VAS revenue.
Mind the margins for both companies
SINA's adjusted net income declined 41% annually to $17 million during the quarter, as Weibo's adjusted net income fell 48% to $67.4 million. Both companies struggled with contracting gross margins:
|
Gross Margin |
Q1 2019 |
Q4 2019 |
Q1 2020 |
|---|---|---|---|
|
|
79% |
81% |
77% |
|
SINA (Non-Weibo) |
53% |
60% |
35% |
|
Total SINA |
76% |
77% |
66% |
Source: Quarterly reports.
The gross margins of both companies' ad platforms contracted due to competition and macro headwinds. However, the gross margin of SINA's non-Weibo businesses contracted because the fintech unit increased the credit loss allowance for its microloans.
In other words, the growth of SINA's fintech business is a double-edged sword: its revenue growth could offset the slowdown in its ad business, but that lower-margin (and arguably higher-risk) revenue will weigh down its gross margins. Meanwhile, Weibo's gross margins could expand again if its live video viewers start buying virtual gifts as the COVID-19 headwinds wane.
But a turnaround might be on the horizon
SINA didn't offer any guidance for the second quarter, but Weibo expects a 7%-12% annual drop in revenue. That forecast is disappointing, but it suggests Weibo's advertising and live-streaming businesses passed a cyclical trough in the tough first quarter.
It's too early to call a bottom for either stock right now, but investors shouldn't dismiss SINA and Weibo's chances for a recovery. SINA trades at just 12 times forward earnings, and Weibo has a forward P/E of 15 -- and those low valuations should limit their downside until the macro outlook improves.
