U.S. Markets close in 1 hr

Why You Should Buy Weibo and Sina Stock After Standout Earnings

Larry Ramer

Leading Chinese social media company Weibo Corp (ADR) (NASDAQ:WB) and its parent company, Sina Corp (NASDAQ:SINA), both reported superb third quarter results recently, showing that both companies are continuing to successfully exploit the tremendous strength of China’s internet advertising sector. Meanwhile, Weibo is still a potential takeover target for Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA). Investors should buy shares of WB stock and SINA stock at current levels to exploit the strength of the sector and the companies. As of August 2017, SINA owned a stake of about 51% of Weibo stock but controlled about 75% of the company’s voting power, according to Investor’s Business Daily.

Why You Should Buy WB Stock and SINA Stock After Standout Earnings

Source: Shutterstock

Weibo and SINA both reported stronger than expected third quarter results. Weibo’s net income soared an incredible 215% year-over-year, while it added an equally amazing 79 million monthly active users last quarter versus the same period a year earlier. As of September 2017, it had average daily active users of 165 million, representing a YOY surge of about 33 million. Meanwhile, SINA’s online ad revenue jumped by an impressive 56% YOY, while its income from operations soared a staggering 231%.

Furthermore, it appears that Weibo’s online payment system is beginning to gain critical mass, as SINA reported that 80 million users have “activated payment accounts” created by the social media website. Sina added that Weibo “has good potential to develop…fee based services going forward.” If Weibo can obtain significant revenue from fee-based services in addition to its large ad revenue, the company’s growth can reach truly stratospheric levels.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Meanwhile, SINA is exploiting Weibo’s strength to boost the growth of its app and improve its other services. “For the last few quarters we have leveraged Weibo to accelerate the user acquisition page and to better use data across (the) two platforms,” said SINA CEO Charles Chao. Additionally, Chao noted that Sina is looking to begin offering financial services to Chinese consumers, giving it another huge potential growth engine.  As of May, Alibaba, a very acquisitive company that is looking to expand to other countries, had a 31.5% stake in Weibo. As I pointed out in September, Alibaba could acquire the rest of Weibo in order to gain more freedom to sell its products on the highly popular website and to expand the Weibo platform to other countries.

Alibaba’s modus operandi seems to be to slowly acquire shares of Weibo from SINA, rather than looking to buy SINA itself, even though SINA’s market cap is around $7.6 billion versus about $23.5 billion for Weibo. The most likely scenario is that Sina is emulating the strategy that Yahoo! took with its stake in Alibaba (i.e., selling the stake to boost its stock price).

In this base case scenario, SINA stock will rise much further as the company sells off the remainder of its Weibo stock to Alibaba. But Weibo stock will get a much bigger lift as Alibaba offers a large takeover premium to holders of WB stock. And conversely, if Alibaba does not look to buy more shares of WB stock, Weibo, assuming that it can remain a premier social network in China, will see the value of its stock soar. And if Weibo can significantly expand its fee-based services business, WB stock will really take off.

Bottom Line on WB Stock and SINA Stock

Given the tremendous growth of Sina and Weibo amid the strength of China’s internet advertising sector, WB stock and SINA stock should continue to rally. Growth investors who are more risk-tolerant and want to bet on a takeover should buy WB stock, while more conservative investors should buy SINA stock, given its lower valuation and its more diversified business.

As of this writing, Larry Ramer owned shares of Weibo.

More From InvestorPlace

The post Why You Should Buy Weibo and Sina Stock After Standout Earnings appeared first on InvestorPlace.