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Weibo Stock Is Still a Risky Play

Will Healy

Weibo (NASDAQ:WB) stock reports its earnings Monday before the bell. The China-based social networking company has suffered in recent months as both the trade war and a weak revenue outlook decimated Weibo stock. The equity has continued to fall as geopolitical events weigh on most Chinese stocks.

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Although WB stock shows a great deal of potential, investors face too much risk by buying this equity approaching earnings.

WB’s Last Earnings Report Will Affect the Current One

Analysts forecast WB stock earnings of 59 cents per share. This would represent a 13.2% drop from the same quarter last year when the company reported 68 cents per share in profits. They also predict revenues of $429.3 million. The company reported $426.6 million in the year-ago quarter.

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However, the revenue outlook for the second quarter hammered WB stock in May. The company announced a revenue outlook for the second quarter of $427 million-$437 million. This came in well below expectations. Up until then, Wall Street had expected second-quarter revenues of $481.8 million, as Regina Borsellino reported. That partially explains why WB stock has lost almost half of its value in the past four months.

As the equivalent of Twitter (NYSE:TWTR) in China, Weibo has seen rapid subscriber growth. However, the company has struggled to monetize that growth. Weibo stock has also become caught up in the selling of Chinese stocks related to the U.S.-China trade war, despite the fact that it does not have direct exposure to the U.S.

What WB Stock Needs

As the company reports earnings, it still finds itself in need of a catalyst that will stem the decline. Weibo beat earnings estimates over the last four quarters. However, traders will want to see some indications that a massive revenue miss will not occur again.

WB investors also need signs that the company will follow in the footsteps of its U.S. counterparts on better monetizing the site. Gaining traction with ads rescued both Twitter and Snap (NYSE:SNAP) in recent quarters. Weibo’s investors want to see the same.

Investors may have good reason to buy WB stock once the trade war abates. Weibo currently trades at a forward price-to-earnings ratio of 11.8. It has suffered a slight earnings slowdown this year. However, Wall Street forecasts earnings growth of 17.2% in fiscal 2020. They also expect annual profit increases to average in the double-digits over the next five years.

To a degree, all Chinese stocks trade at a discount. This is due to investors having to buy Cayman Islands-based holding companies that represent firms in China. Still, I think the low forward P/E ratio prices in both that risk and the concerns over the trade war.

The Bottom Line on Weibo Stock

Despite the low price, I would not buy WB stock before it announces earnings. Investors look into the future, so as long as earnings exceed expectations, I see no issues with the temporarily lower profits.

However, traders also likely feel the sting of the much lower revenue outlook that came in the last earnings report. Weibo needs to avoid further surprises here. Moreover, the continued intensity of the trade war continues to spook investors. Fears that China will invade Hong Kong also have investors on edge. Chinese equities such as WB stock will feel the pain of such geopolitical actions whether or not they relate to the business.

However, once the trade war ends, investors will probably see WB stock as an equity with a low P/E ratio registering double-digit profit growth. That makes for a promising outlook, eventually.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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