Shares of Chinese social blogging platform Weibo (NASDAQ:WB) have been in a secular downtrend ever since the trade war officially started in late January 2018. At the time, Weibo stock was a $130 stock that could do no wrong. By August 2019, Weibo stock was a $35 stock that could do no right.
Source: testing / Shutterstock.com
In other words, in a 19 month stretch from January 2018 to August 2019, WB stock lost more than 70% of its value and went from big-time winner to big-time loser.
But, signs are starting to emerge that this multi-month decline in WB stock may be over. Specifically, over the past month, WB stock is up nearly 25% – marking one of its biggest one-month rallies over the past two years.
Is recent strength in WB stock just noise? Or is it the start of a big, multi-month rebound? I think the latter – for three big reasons.
First, the fundamentals are turning a corner, and imply that the stock is undervalued here and now. Second, the optics are steadily improving, and project to keep improving for the foreseeable future. Third, the technicals support the idea that WB stock tested and held a multi-year support level at $40, and is now ready to roar higher from here.
The takeaway? The turnaround in WB stock is here to stay, and buying WB stock on this rebound bid seems like the smart move.
1. Improving Fundamentals
First, and foremost, this turnaround in WB stock seems like the real deal because the fundamentals underlying WB stock are turning a corner, and imply that the stock is undervalued here and now.
Underneath the hood, Weibo’s numbers last quarter showed signs of gradual improvement.
Monthly active user growth quarter-over-quarter was 4.5% – the biggest sequential user growth rate in four quarters – amid multiple initiatives from management to make the platform more immersive, social, and engaging.
Further, constant currency revenue growth is expected to be 7.5% next quarter, up from this quarter’s 7% growth rate and ending a multi-quarter streak of decelerating revenue growth which dates back two years.
Perhaps most importantly, trailing 12-month adjusted EBITDA margins dropped just 14 basis points quarter-over-quarter, the slowest compression there in three quarters. The reason? Management is effectively cutting back on sales and marketing spend.
Net net, then, the quarter had all the makings of a “turnaround quarter.” User growth acceleration? Check. Revenue growth trend reversal? Check. Margins starting to stabilize? Check.
Given that these positive developments are the result of management’s recent actions, I think that these positive developments have a runway. Broadly, I think Weibo can and will return to double-digit revenue growth over the next several years, while margins will inch higher with improved scale, paving the path for $5 in EPS by fiscal 2025.
Based on a market-average 16-forward multiple and 10% discount rate, that equates to a 2019 price target for WB stock of $50.
2. Improving Optics
Second, the turnaround in WB stock appears to have legs because the optics surrounding the stock are improving, and will continue to improve for the foreseeable future.
There are three things here. First, China’s economy, which has been rattled by the trade war for 20 months, is finally starting to stabilize, led by a surprising rebound in China’s consumer economy. This stabilization should persist, and potentially even lead to a rebound. As the China economic environment does improve, it will create a rising which will lift all boats, Weibo stock included.
Second, the U.S.-China trade war, which has coincided with a 70% drop in WB stock, is cooling off. The U.S. and China have agreed to resume trade talks in October. Given that neither side wants to escalate this trade war much further, I think that the October trade talks will actually lead to a meaningful resolution, or won’t result in any further escalation at the very least.
With the trade war headwind easing both now and for the foreseeable future, WB stock can and should move higher with most other China tech stocks.
Third, Weibo is launching its own Instagram-like platform, dubbed Oasis. This new product has the potential to be really, really big. It’s an image-focused, social lifestyle app that appears to be catered towards visual experience sharing. Apps like this in the U.S. – see Instagram, Snap (NYSE:SNAP), Tik Tok, etc – have done very well. Oasis could do just as well in China. The hype surrounding this new app will inevitably provide a multi-quarter lift to Weibo investor sentiment.
3. The Technicals Support a Reversal
The third big reason to believe in the WB stock turnaround is that the technicals imply that this stock could be in the process of a huge reversal.
See the attached chart. We’ve all seen charts like this before. They look like pyramids. The stock goes up super big in the first half of the chart, and then proceeds to give back all those gains in the second half of the chart.
Click to Enlarge
But, every time you get this pyramid formation, you come to a point where the stock has retraced all of its gains in the given time frame. WB stock is at that point right now. By eclipsing $40 in August 2019, Weibo stock has given up all of its gains over the past few years and has completed this pyramid formation.
What’s next? If the stock doesn’t hold the support level, more downside. If it does, a potential reversal.
Weibo stock did hold this support level around $40. It has since shown significant signs of strength in rebounding to the mid-$40’s. Thus, the technicals here seem to imply that the worst of the Weibo stock decline is over.
Bottom Line on Weibo Stock
Weibo stock has been in a secular downtrend since early 2018. But, all major signs (improving fundamentals, favorable optics, and bullish technicals) imply that this downtrend is over.
As such, over the next several months to quarters, I think WB stock can and will stage a meaningful recovery rally.
As of this writing, Luke Lango did not a hold a position in any of the aforementioned securities, but may initiate a long position in WB within the next 72 hours.
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