Are SINA and Weibo Getting Too Cheap to Ignore?

Shares of SINA (NASDAQ:SINA) and Weibo (NASDAQ:WB) have both tumbled this year, mainly due to escalating trade tensions between the United States and China. Yet their sell-offs seem overdone, since both tech companies are well insulated from a potential trade war.

SINA is one of the oldest internet companies in China. It spun off its Twitter-like social network, Weibo, via an IPO in 2014, but still holds a majority voting stake in it, and generates most of its revenues from that stake. The rest of its revenues come primarily from its older portal and a new fintech unit.

A group of young people using their smartphones.

Image source: Getty Images.

Meanwhile, Weibo flourished as a standalone company. It attracted popular celebrities to its platform, extended its reach into rural areas, and expanded its ecosystem with Reddit-like forums, live video streams, and e-commerce features. Those expansions helped it become one of the largest social networks in China.

Last year was great for both stocks. Shares of SINA and Weibo rallied 65% and 155%, respectively, as both companies repeatedly beat expectations with robust sales and earnings growth. But so far in 2018, SINA has tumbled 17% while Weibo is off 15%. Do these pullbacks represent buying opportunities?

How fast are SINA and Weibo growing?

SINA and Weibo both posted high double-digit sales growth over the past four quarters. Weibo’s growth generally outpaces SINA’s, which is throttled by its more mature portal business.

Company

Revenue  Growth Q2 2017

Revenue  Growth Q3 2017

Revenue  Growth Q4 2017

Revenue  Growth Q1 2018*

SINA

47%

61%

61%

59%

Weibo

72%

81%

77%

76%

YOY revenue growth. Source: Quarterly reports. *Uses new ASC 606 standard.

For the full year, analysts expect SINA’s revenue to rise 45%, compared to the 54% growth it delivered in 2017. Weibo’s revenue is expected to grow 57%, compared to 75% growth last year. However, some of the deceleration at both companies can be attributed to the recently implemented update to the ASC 606 accounting standard, which changes the revenue recognition of certain items.

However, SINA is still much cheaper than Weibo in terms of price-to-sales valuations. SINA currently trades at less than 3 times this year’s sales, while Weibo trades at nearly 11 times this year’s sales.

How profitable as SINA and Weibo?

SINA’s older portal business causes it to consistently report lower margins than Weibo.

SINA Operating Margin (TTM) Chart

SINA Operating Margin (TTM) data by YCharts

Strong revenue growth and tighter cost controls enabled both companies to expand their margins and generate decent earnings growth in recent quarters. Weibo’s numbers, however, are clearly more impressive than SINA’s.

Company

Net Income Growth* Q2 2017

Net Income Growth* Q3 2017

Net Income Growth* Q4 2017

Net Income Growth* Q1 2018

SINA

165%

32%

24%

(6%)

Weibo

144%

111%

90%

95%

*YOY non-GAAP net income growth. Source: Quarterly reports.

SINA struggled due to rising expenses in marketing, user acquisition, and personnel in recent quarters. Weibo has spent less money to grow its monthly active user numbers, which climbed nearly 21% annually to 411 million last quarter.

SINA’s soft first-quarter numbers were disappointing, but analysts still expect its non-GAAP earnings to grow 17% this year. Weibo’s earnings are expected to rise 57%.

Based on those forecasts, SINA trades at 26 times this year’s earnings, while Weibo has a slightly higher ratio of 31. Neither stock can be considered “cheap,” but Weibo’s stock looks cheaper relative to its earnings growth potential.

But is either stock too cheap to ignore?

These companies’ core advertising businesses should continue growing regardless of the trade conflict between the U.S. and China. But both remain vulnerable to the Chinese government, which continues to pressure them to censor content, as well as to bigger ecosystem rivals like Tencent‘s WeChat, the most popular mobile messaging app in China.

Shares of SINA and Weibo have been painful to own so far this year, but I don’t think that they’re cheap enough to be considered “undervalued” yet. Weibo’s stock looks more tempting than SINA’s at these prices, but a fresh batch of negative headlines about China could drive both stocks lower before they finally rebound.

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