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Weibo Corp. (ADR) Could Have 25% Upside From Here

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Are we in a trade war with China or not?

I think this week we are officially “on pause” with our trade war while negotiations continue.  Though I think the last update was that President Trump was not happy with how they are going.  Either way, the ongoing fracas (yes, fracas) continues to dent the mood of investors in the US and clearly in China as well.  The Hang Seng Index is only up 2% this year while the Shanghai Comp is down 5%.  Meanwhile, here in the U.S., the S&P 500 (SPY) is only up 2% while the Nasdaq (QQQ) has gained 8%.  It is tempting to not get involved in equities with so much uncertainty.  But sometimes, this uncertainty presents opportunities to buy stocks that should not be affected by the worries of the day,  We think Weibo is that opportunity now.

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More than just the “Twitter of China”

Weibo Corp. (WB), which is literally translated as microblog in Chinese, is often referred to as “the Twitter (TWTR) of China,” but it’s actually more of a cross between both Twitter and Facebook (FB), so it’d more accurate to put it in a class of it’s own and simply refer to it as one of China’s leading social media, advertising, and content distribution companies.  But so far this year, the stock is down fractionally vs. +40% for Twitter and +5% for Facebook, and we know what kind of problems Facebook has had.  I know that Chinese stocks often get a discount vs. other countries, but this one has growth and a reasonable valuation.  You should microblog about it after you read more.

Why has the stock been down?

The stock is down from $142 in February really for three reasons.  First is the aforementioned aversion to Chinese stocks, which we feel is misplaced here.  Second, SME advertising in 1Q was down 11% Quarter over Quarter.  One reason for the drop off is likely just more acute seasonality as the company gets bigger.  We think that muted seasonality is now in the numbers.  Third, the company did have some adjustments due to ASC605, which may have delayed revenue recognition.  We feel that this is also now a know issue.  So even though these issue are real, we think they are overblown and in the rear view mirror.  Let’s look at how impressive the numbers have been and how great they are expected to be.

Kicking off fiscal 2018 with a bang

On May 9, Weibo released its fiscal 2018 first-quarter earnings results, and they were nothing short of massive. Here’s a breakdown of some key statistics:

Metric Q1 2018 Q1 2017 YoY Change
Advertising & marketing revenues $3o2.95 million $169.30 million 78.9%
Value-added service revenues $46.93 million $29.90 million 57.0%
Total revenues $349.88 million $199.20 million 75.6%
Non-GAAP net income $112.64 million $57.83 million 94.8%
Non-GAAP net income per share $0.50 $0.26 92.3%
Monthly active users 411 million 340 million 20.9%
Daily active users 184 million 154 million 19.5%

What kind of growth can we expect going forward?

Weibo’s growth doesn’t appear to be slowing down any time soon; check out these projections for revenue and earnings-per-share growth through fiscal 2020:

Revenue:

Period Projected Revenue YoY Growth
Fiscal 2018 $1.81 billion 57.4%
Fiscal 2019 $2.53 billion 39.8%
Fiscal 2020 $3.29 billion 30.0%

Earnings per share:

Period Projected EPS YoY Growth
Fiscal 2018 $2.78 54.4%
Fiscal 2019 $4.05 45.7%
Fiscal 2020 $5.98 47.7%

Impressive, right?

A very inexpensive growth stock

Based on the EPS projections provided above, Weibo’s stock trades at just 33x times Next-twelve-month earnings, only 25.5 times calendar year 2019’s, and a mere 17 times calendar 2020’s, all of which are incredibly attractive given its growth rate and what we believe are surmountable short-term issues.

So, what’s a fair price for Weibo’s stock? The market will ultimately decide that, but we think given its growth profile and valuation, this stocks has plenty of room for upside, even if the trade war with China rages on and off and on and off…..

At Market Realist, we urge investors to understand the numbers, ignore the noise, and make objective decisions that should lead to 20-30% upside with limited downside.

JP Gravitt

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