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Why SINA Stock Sank 36% in May

Keith Noonan, The Motley Fool

What happened

Shares of SINA (NASDAQ: SINA) fell 36% in May, according to data from S&P Global Market Intelligence. After climbing in April thanks to an improved outlook for a resolution to trade disputes between China and the U.S., the social media and online content company's stock retreated sharply due to an escalation of the trade conflict and an uninspiring earnings release. 

SINA Chart

SINA data by YCharts.

SINA reported first-quarter earnings on May 23, delivering 7.8% year-over-year revenue growth and 21% earnings growth. The quarterly results might not have been particularly distressing on their own, but guidance adjustments reflecting challenging conditions in the advertising market disappointed investors and prompted a big sell-off. 

A woman using a mobile phone, with white bubble icons hovering over it.

Image source: Getty Images.

So what

SINA has typically generated most of its revenue from online advertising, both in its portal segment and in its microblogging social media spinoff Weibo (NASDAQ: WB), which accounts for the large majority of overall sales. As China's economic growth has slowed, companies are understandably more hesitant to spend on ads, and this is having a clear impact on the country's digital advertising market and companies that depend on it. Q1 advertising revenue from the Weibo segment still grew 13% year over year (20% on a constant currency basis), but ad sales for its portal segment fell 27% (or 22% on a currency-adjusted basis) compared to the prior-year period. Unfortunately, the near-term growth outlook for Weibo now looks significantly less favorable. 

In addition to the macroeconomic challenges, SINA has also had to contend with increased regulatory attention being directed at its platform, with China's content regulators requiring that the company do more to ensure that posts on its platforms are in line with the country's decency standards. The company pulled its SINA News and SINA Blog platforms in response to pressure from regulators in April, pledging to put them back online after the government's concerns that they were being used to spread pornography and fake news. 

Now what

SINA doesn't typically provide quarterly guidance, but it says that it expects Weibo's second-quarter sales to grow between 7% and 10% year over year on a constant currency basis, a substantial deceleration from recent quarters and well below the roughly 20% growth that analysts had targeted. Due to the slowdown for Weibo's ad business, management now expects SINA's full-year sales to come in between 10% and 15% lower than its previous guidance, which had called for annual sales to come in at $2.44 billion and $2.59 billion.

Shares of SINA trade at roughly 15 times this year's expected earnings. 

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Sina and Weibo. The Motley Fool has a disclosure policy.