Weibo (WB +0.23%), the company affectionately known as "China's Twitter," reported earnings last night. News that the company had beat on revenues, beat big on earnings, and improved guidance yielded an "attaboy" from analysts at Piper Jaffray -- but a more muted response from investors. Why?
Piper Jaffray says: Buy Weibo
As detailed in a write-up on StreetInsider.com this morning, Weibo raked in nearly $125 million in revenue in Q3, exceeding both Wall Street estimates and its own prior guidance. Pro forma earnings of $0.10 a share were three times what Wall Street had expected. And Weibo seems to be promising a follow-up beat in the current quarter, with new revenue expected to come in ahead of the Wall Street consensus of $147 million for Q4.
Hearing all of this, investment banker Piper Jaffray -- already positive on the stock -- rushed out a price target hike Thursday morning. The analyst says Weibo shares, currently priced at $17 and change, could hit $23 within a year -- a 32% profit for investors today.
But is Piper Jaffray right about that?
Let's go to the tape
Initial indications look good. Ranked in the top 15% of analysts we track on Motley Fool CAPS, Piper is particularly good at picking Internet stocks. Over the more than nine years that we've been tracking this analyst's performance, Piper has racked up a record of 60% accuracy in the "Internet Software and Services" sector.
Among its better current recommendations:
|
Company |
Piper Jaffray Said: |
CAPS Says: |
Piper Jaffray Picks Beating (Lagging) S&P By: |
|---|---|---|---|
|
Baidu.com (BIDU +2.24%) |
Outperform |
**** |
856 points |
|
Rackspace Holdings |
Outperform |
*** |
243 points |
|
Equinix |
Outperform |
*** |
218 points |
As far as why Piper is recommending Weibo today, the answer goes beyond just the stock's strong outperforming of expectations yesterday. According to the analyst, Weibo is likely to grow revenue at 30% to 40% annualized over at least "the next several quarters."
Weibo seem to be especially adept at expanding its mobile business, which Piper notes is growing even faster than overall revenue. Up 134% sequentially in Q2, mobile revenue growth hit 136% in Q3. In other words, Weibo's mobile business isn't just growing -- its rate of growth is accelerating.
Valuing Weibo
All that being said, investors may still be leery of investing in Weibo. On CAPS, our members are currently rating Weibo as only a two-star stock, suggesting its prospects for beating the market are iffy -- and for two reasons. Firstly, the company's reputation as China's Twitter (NYSE: TWTR) may be more of a curse than a blessing. Here in the U.S. after all, our own Twitter isn't exactly a powerhouse of profits. According to data from S&P Capital IQ, five years of reported financials show Twitter has never earned a dime from its business -- and that's despite Twitter reporting 58% revenue growth last quarter -- 10 points faster than Weibo.
Secondly, although in contrast to Twitter, Weibo is both profitable and free cash flow positive, the $22 million that Weibo earned over the past 12 months gives the stock a valuation of 170 times earnings. That hardly seems cheap -- even if Piper is right about the "30% to 40%" growth rate.
A better way to make money
So if Twitter isn't earning a profit, and Weibo is -- but may cost too much -- then what should investors buy instead? Here, I'd humbly point to one of Piper's past recommendations that has worked out pretty well for investors: Baidu.
Priced at less than 40 times earnings today, Baidu shares aren't exactly "cheap," but they're a whole lot cheaper than Weibo. And with analysts on Capital IQ forecasting a growth rate of 27% for Baidu, the difference between Baidu's projected growth rate, and (the low end of) the growth rate projected for Weibo look pretty similar.
Long story short, Piper Jaffray's stellar record in picking Internet stocks has me leery of going short Weibo -- but I'd much rather go long Baidu.
