Will SINA Finally Stand Up to Baidu?

Source: SINA

After the Internet boom of the late 1990s and its subsequent bust in the early 2000s, many investors hoped for just one more tech bubble. As the Chinese Internet industry has developed, some of those boom-seeking investors have sought out the best players in the space, and for a long time SINA (SINA) has been among the top contenders for long-term success. Yet recently, competition from Baidu (BIDU -0.09%) and other aspiring Internet companies in China has weighed on SINA's growth, and the stock has fallen dramatically even as Baidu's shares have kept climbing. With SINA reporting third-quarter earnings Wednesday afternoon, shareholders want to see signs of a rebound for the company against its closest peers.

SINA has worked hard at making the most of its growth opportunities, with the IPO of its Weibo (WB 0.26%) micro-blogging site earlier this year still leaving SINA with substantial holdings in its future success. Yet SINA has had to deal with some controversy recently that has some questioning its ability to retain a leadership position in China's Internet arena. Let's take an early look at what's been happening with SINA over the past quarter and what we're likely to see in its report.

Stats on SINA

Source: Yahoo! Finance

Can SINA start growing faster once again?
Investors haven't been entirely confident about SINA earnings in recent months, easing expectations downward for the third quarter and more dramatically downgraded their projections for profitability in 2015 by cutting their EPS outlook by more than a quarter. The stock has kept struggling, falling 14% since early August.

SINA's second-quarter results showed the contrast between reasonable-looking growth numbers and some concerns about its fundamentals. SINA saw revenue climb 19% on a 29% gain in advertising revenue, and improvement in gross margins helped propel net income up by 37%. The company also projected solid revenue guidance for the third quarter. Yet when you take out the impact of Weibo and look more closely at its now-core portal business, SINA saw a 7% decline and projected a further drop of around 8% to 10% for the third quarter.

Source: SINA Weibo

In addition, part of the confusion about SINA stems from different ways of valuing the stock. From one perspective, SINA seems dirt cheap, as the value of its balance-sheet assets added to its stake in Weibo leads to a figure that's close to where the stock currently trades. Yet on an earnings-multiple basis, SINA looks even more expensive than Baidu, despite having what many see as inferior prospects compared to its larger rival.

Over the past quarter, a couple of troubling events have shaken confidence in SINA. First, when Chinese authorities revoked its license to show online videos earlier this year, it stopped SINA from showing World Cup matches on its portal sites. Although much of the soccer tournament was played during June, July's knockout-stage matches could have drawn even more traffic to SINA if it had been allowed to show them. Moreover, the license issue still hasn't been resolved, raising questions about the long-term viability of the portal. Moreover, with SINA's chief news editor having resigned last month to join a rival company, investors don't see the internal commitment they'd like from upper-level employees. Having lagged behind Baidu and other players in making major strategic moves, SINA doesn't have the clear vision that makes shareholders believe in its future.

In the SINA earnings report, it will be important once again to look not only at the company's overall results but also to separate out Weibo's impact from how SINA's portal business is doing. Eventually, SINA is likely to spin off the rest of its stake in Weibo, and at that point, investors will need to know whether the right course of action is simply to give up on SINA's core portal business or whether the company truly has the potential to compete effectively against Baidu and its peers. At least for now, SINA hasn't yet demonstrated much confidence in a promising future.