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Witness Investors Overpaying for Weibo

- By Mark Yu

Weibo (WB), China's equivalent of Facebook (FB) and Twitter (TWTR), delivered its fourth-quarter and full-year fiscal 2016 results last week. In 2016, the $10.9 billion Chinese social media company delivered 37% sales growth to $655.8 million compared to its previous year of operations. Weibo also had a 211% profit increase to $108 million - representing a profit margin of 16% for the period compared to 7.3% in 2015.*


*Weibo delivered profit losses in both fiscal years 2013 and 2014.


"Our growth in the fourth quarter was exceptional with ad revenue from key accounts and SMEs doubling year over year. Weibo's user scale, breadth of ad offering and leadership as a social media platform in China put us in a unique position to take advantage of the marketing budget shift toward mobile, social and video.

"Our focus to grow scale in users, content creators, customers on our platform is translating into significant operating leverage." - Gaofei Wang, Weibo's CEO



Valuations

Weibo is way overvalued right now compared to its peers. According to Reuters data, Weibo had a trailing price-earnings (P/E) ratio of 134.6 times (industry value 37.2), price-book (P/B) ratio of 15.34 times (industry value 5.5) and price-sales (P/S) ratio of 18.4 times (industry value 6.4).

The Chinese social media company did not have trailing dividend yields.

Total returns

Weibo ADR shares significantly outperformed the broader Standard & Poor's 500 index since ADR historical price became available. Since Weibo's initial public offering in April 2014, Weibo ADR shares appreciated 152% compared to 33% for the S&P 500, which included dividends for the latter.

Weibo

Weibo, formerly called T.CN Corp., was launched initially as a microblogging service in 2009 by SINA Corp. (SINA) and is a leading social media platform in China. SINA is a $5 billion online media company serving China and the global Chinese communities.

In 2011, Weibo upgraded into social networking features and improved its open platform architecture to support internally developed and third-party developer applications on Weibo's platform. According to filings, Weibo combines the means of public self-expression in real time with a powerful platform for social interaction as well as content aggregation and distribution. Also, any user can create and post a feed of up to 140 Chinese characters and attach multimedia or long-form content.

Weibo is a Cayman Islands-based holding company and conducts its business in China through 100%-owned Weibo Technology and Weimeng. Also, Alibaba (BABA) wholly owned Ali WB Investment Holding Limited invested $585.8 million in Weibo preferred and ordinary shares representing about 18% of the company back in 2013.

(Organizational Structure, Weibo 20-F)

As of March 2016, SINA owned 54.5% of Weibo outstanding shares while an Alibaba subsidiary named Ali WB owned 30.5%. Further, SINA had 78.3% of voting power while Ali WB had 14.6% or 92.9% in total for both major shareholders.

In 2016, Weibo had 313 million monthly active users - 90% of which were mobile users - and 139 million daily active users. In comparison, the social media company had 236 million and 106 million during the year prior.

Weibo currently operates and manages its business in two principal business segments globally - a dvertising and marketing services and other services.

(Revenue segments, Weibo 20-F)

According to company filings, Weibo does not allocate operating costs to its segments and "does not use such information to allocate resources or evaluate the performance of the operating segments."

Advertising and marketing services

Sales for advertising and marketing services grew 42% to $571 million or 87% of total Weibo sales in fiscal 2016.

Other services

Sales in other services grew 12% to $84.8 million or 13% of total Weibo sales in 2016.

In the past three years, Weibo had an average sales growth of 53%.

Cash, debt and book value

As of December, Weibo had $396 million in cash including short-term investments and $0 debt. The social media company also had 1.1% of $1 billion assets in goodwill and intangibles while having a book value of $757.4 million compared to $628 million the year prior.

Cash flow

Unfortunately, no cash flow information was provided in recent Weibo press releases including in quarterly or 6-K filings.

(20-F, Weibo)

In review, Weibo delivered its first positive cash flow from operations fiscal year 2015 since its IPO in 2014. The company had $182 million in cash flow compared to losses of $19.4 million the year prior.

Noticeably, Weibo had increased cash flow specifically in stock-based compensation, from $13.8 million in 2015 to $26.4 million in 2015. Also, investment-related impairment cash flow grew to $8 million from $2.5 million in 2014. Cash inflow related to accounts receivable due from Alibaba increased to $10.7 million in contrast to the outflow of $43.4 million the year prior.

Meanwhile, capital expenditures or cash flow allocated in property and equipment purchases were $10.9 million in 2015 leaving Weibo with $171 million in free cash flow compared to free cash outflow of $34.2 million in 2014.

(20-F, Weibo)

As observed, a recent boost in Weibo's cash prior to 2015 operations majority came from its IPO proceeds. Since 2013, Weibo received $42.5 million in funding from SINA while repaying more to the latter with $431.72 million until fiscal 2015.

Conclusion

Weibo ADR shares are significantly overvalued despite carrying an attractive balance sheet and exhibiting admirable user growth.

Meanwhile, continuous top line growth and improving profitability should help bring Weibo in more sensible valuation levels. In comparison, Facebook had near 40 times earnings and seven times book value multiples while having about half, 50% to 60%, Weibo's total growth in both monthly and daily active user growth figures.

Nonetheless, business arrangements from both major stakeholders SINA and Ali WB could affect Weibo's cash flow. As mentioned earlier, SINA owns and commands most of the voting power in Weibo while the latter derived 29% or $116.7 million of its 2015 advertising and marketing sales from Alibaba alone, according to company filings.

(Weibo Share Price and P/S Ratio, GuruFocus)

Currently, 15 analysts have a median target of $60 a share for the Weibo ADR shares. Asking an 80% margin or $48 per ADR share would still indicate a good premium of trailing P/E and P/B ratios 121 times and 13 times.

Meanwhile, asking an 80 times earnings multiple - twice Facebook's - would give a lower value of $32 per ADR share.

This just shows that the market is willing to pay such a significant premium to obtain a share in an excellent social media company with operations in China.

In summary, Weibo ADR shares are a pass.

Disclosure: I do not have shares in any of the companies mentioned.

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This article first appeared on GuruFocus.