Weibo Stock: It’s Hard To Slay A Social Media Giant (NASDAQ:WB)

Chinese social media stock Weibo (NASDAQ:WB) has underperformed even its PRC peers this week on the back of a Bank of America Securities downgrade, dipping below $9 per share, which represents not only the 52-week low, but a low for the entire trading history of the stock. With a strong record of profitability, single digit price-to-earnings ratio, a third of its market cap in net cash, half its market cap in long term investments, and a powerhouse competitive position as China’s equivalent to Twitter/X, Weibo offers an interesting, complex opportunity for value hunters, with equally interesting risks unique to the stock.

Weibo, literally the Chinese term for “microblog,” emerged in the aftermath of China’s banning of Twitter in 2009. At the time there were many “Weibos,” but only one survived: the platform created by Sina Corporation, originally called “Sina Weibo,” now shortened to just Weibo as competitors like “Tencent Weibo” and “NetEase Weibo” ceased to exist. Today, the platform boasts 600+ million monthly active users (250+ million DAUs), and consistently tops lists of most important Chinese social media sites compiled by market research companies: see here, here, here, and here.

By the Numbers

Pretty much every US-listed Chinese equity today has great numbers relative to their valuations due to geopolitical tensions, and Weibo is no exception. Weibo actually has a great deal more embedded risk beyond its existence as a Chinese company, which we’ll get to later. Financially, the company is in great shape, despite some recent headwinds. Unlike Twitter, which oscillated between the red and black prior to its acquisition by Elon Musk, Weibo has posted a consistent history of operating profits since 2015:

Weibo’s revenues dipped significantly in 2022 before slowing the bleed in the latter half of 2023:

The revenue stagnation has been due to weak demand from advertisers, with many key verticals such as FMCG failing to recapture growth even as China’s economy emerges from zero-COVID lockdowns. This is a secular challenge faced by Weibo’s business that, according to CEO Gaofei Wang, is due as much to competition as to pandemic-related disruptions:

However, for the FMCG verticals, which used to be heavily consumed by our users such as cosmetics and food verticals. The company ecosystem has been facing challenges over the past three years due to disruption from the pandemic and external competition. We anticipate the resumption of these verticals will take time as we are exploring differentiated, operational strategy to reconstruct our company ecosystem, aiming to offer better support for the end market for these sectors.” – Gaofei Wang, Q2 2023 conference call

Despite headwinds, Weibo continues to be a cash machine, achieving $513M operating profit TTM and $1.68 EPS TTM, demonstrating the business’s ability to scale down in the face of revenue setbacks. As of Q3 2023, it has $837M in net cash equivalents (including its short-term loan to parent company Sina) and $1.28B in long term investments (it’s typically prudent to mark these down by half given the opacity in fair market values). The performance of its long term investment portfolio is definitely a material factor in Weibo’s financial metrics, it is why the company took a huge hit to EPS in 2022. Due to the size of the portfolio, Weibo can be partially seen as a holding company of many other businesses in addition to its namesake platform, a bit similar to Berkshire Hathaway (BRK.A) on a much smaller scale.

Monthly active users is one metric where Weibo continues to see growth, gaining 21 million users in the third quarter of 2023 to reach 605M. Of these, 95% are accessing the platform on their mobile devices. Users are monetized through an advertising+subscriptions model, with the split being approximately 88% advertising and 12% subscriptions.

MAUs have witnessed a CAGR of +6.3% over the trailing 5-year period, growing from 446M in 3Q 2018 to 605M today. Of these, approximately 40% are daily active users, an engagement metric that has remained stable over this time period. Weibo’s MAUs demonstrate impressive reach: it’s being accessed on a monthly basis by 60% of China’s 1.07 billion total estimated internet user base. This is more than all of Twitter’s users worldwide (est. 368M in 2022)!

Weibo’s reach is the key to its moat. Despite rising competitive pressures brought by short-form video content (a primary headwind cited by BofA’s Miranda Zhuang in her downgrade), it is crucial that this competition is coming from outside the microblog category. While there are other platforms challenging Weibo for ad dollars, like Douyin and Xiaohongshu, none of them are threatening the company within its own category. Much like social media giants Twitter, Facebook, and Instagram in the West, and WeChat in China, Weibo has achieved scale where it is almost impossible for alternative platforms of the same nature to compete against it, due to entrenched network effects and switching costs associated with having to rebuild that network.

Although Weibo’s growth has slowed, which is to be expected for a mature platform, and it is fighting younger, more fashionable businesses for advertisers’ budgets, it is almost guaranteed to remain relevant in China so long as the microblog model survives. Moving forward, growth will have to come from better ad algorithms to monetize user engagement, building out the subscription segment of the business (Twitter has been leading the charge with experimenting on value-adds for subscribers, such as boosting their reach, tactics Weibo may copy if they prove effective), and potentially, a re-rating of Chinese equities at large through improved investor sentiment.

The Chinese government appears to be taking measures to try to stimulate investor demand, in contrast to the harsh crackdowns of 2021: for instance, the National Press and Publication Administration walked back draft rules released last month to regulate microtransactions and virtual rewards in video games when gaming stocks sold off $80 billion on the news (despite the original rules actually making sense in regulating potentially predatory monetization tactics by video game companies). As reported by FT, quant funds also appear to be moving back into China due to both alpha + diversification opportunities and reduced competition after the mass investor exodus in recent years.

Valuation

Most of Weibo’s value as a business comes from the durability of its position as a category-defining social media platform reaching more than half of China’s internet users, rather than explosive user growth (those days are behind it). Social media giants are really hard to kill once they’ve grown up. Valuing the company: there are two possible valuation strategies for Weibo, as a multiplier of earnings or against Twitter as a comp. Using the first strategy: Weibo generated ~400M net income in the trailing 12 months, which appears to be normalized rather than an outlier like FY2022. Apply a 15x multiplier, which is fair for a legacy, low-growth but dominant social media company, add ~$800M net cash equivalents, and ~$600M long term investments (half the portfolio’s carrying value), we get a total business value of $7.4B. Apply -50% discount for geopolitical risks associated with China, we arrive at fair value of $3.7B or $15.80/share against ~234M common shares outstanding.

Using Twitter as a comp is interesting since the company’s last full year of public disclosures was 2021. Twitter’s 2021 SEC filing showed revenues of ~$5B. Elon Musk purchased Twitter for $44B, and earlier this month, Fidelity, who participated in the investment, reduced the value of its stake by -72%, implying Twitter to be worth $12.3B today. Using the 2021 revenue figure, Twitter would be trading at a 2.46x price/sales multiple. Apply the same multiple to Weibo’s $1.74B of revenues TTM, we get a valuation of $4.3B for the whole company or $18.30/share. We won’t apply the China discount this time for a few reasons: Twitter’s current revenues are likely significantly down from 2021 (one reason Fidelity marked down its stake), Weibo’s greater ability to convert revenues to profits (Twitter was unprofitable prior to the buyout), Weibo’s much stronger liquidity position, and risks associated with Twitter’s rebranding to X, meaning the two companies ought to be close to risk parity.

While valuing Weibo using Twitter as a comp is an interesting theoretical exercise, it relies on outdated data and third party metrics, so ultimately the earnings-based valuation model is preferable.

Risks

One of the main risk factors to the Weibo thesis, other than the geopolitical concerns that affect all Chinese stocks, is related party risk in terms of its relationship to parent company Sina Corp and Chairman Charles Chao. A few years ago, Sina was also a publicly traded company controlled by Mr. Chao through super-voting shares. In 2020, Chao, then CEO of Sina Corp, took Sina private in a $2.6B deal at a buyout price that represented an +18% premium to Sina’s market price. Sina minority shareholders were outraged, objecting to the merger on grounds of not receiving fair value for their Sina stock. These shareholders had legitimate reason for their objection: most of Sina’s value came from Sina’s stake in Weibo, which at the time was worth more than the buyout price.

Shareholder dissent proved futile, since Chao had majority voting rights through his company New Wave. The acquisition passed. Today, Sina is a private company owned by Mr. Chao, and Weibo is a publicly-traded company controlled by Sina through super-voting shares despite Sina holding only 38% of equity.

On one hand, you could say the original Sina shareholders eventually came out ahead in this deal given the collapse in Weibo’s share price over the past 3 years…the $2.6B that Chao paid to acquire Sina, and by extension, Sina’s 38% stake in Weibo, can now buy Weibo in its entirety. On the other hand, the transaction showed how little power minority shareholders have with insider-controlled companies like Sina and Weibo when management does not necessarily act in shareholders’ best interests.

Due to the close relationship between Sina and Weibo, and Sina now being a black box to investors as a private company that no longer needs to file disclosures, any unscrupulous related party transactions would be difficult to detect, and even if detected, equally difficult to stop. For example, Weibo recently purchased the Sina Plaza office complex from its parent for $218M, assuming an additional $281M of liabilities in the process, thus valuing the building at nearly $500M – was this a fair price?

An independent appraiser was hired for the assessment but in the end it’s impossible to be sure. Sina Plaza is a prime piece of Beijing real estate for sure, smack dab in the middle of Zhongguancun Science Park, but half a billion dollars is also a lot of money (for reference, Google paid $2.1B for its NYC headquarters of a similar square footage, so the Sina Plaza price is arguably fair).

That said, while Sina shareholders got lowballed in the buyout, neither Sina Corp nor Weibo has ever been found to engage in outright fraudulent activity during their tenures as publicly traded companies. A couple of other factors also modulate the related party risk: 1) Alibaba’s (BABA) 30% stake in Weibo, and 2) Weibo’s Hong Kong dual listing (ticker 9898.HK). That means any shenanigans on part of Weibo management would screw over not only American investors on the other side of the world, but Chinese investors at home and major partner Alibaba. The risk still exists to be sure, but it’s not quite as high as it was with Sina Corp.

Another risk factor worth keeping an eye on is China’s recent real name rule stating social media accounts with more than 500,000 followers must publish under their real names. Although many verified accounts on Weibo of that size already use their real names, it is definitely worthwhile to monitor what effects this policy may have on Chinese social media users, not only on Weibo, but across all of China’s social media platforms.

Takeaway

Weibo definitely isn’t a growth story at this point in time, longs would be betting on a legacy social media platform with large network effects successfully sustaining cash flows in excess of its sub-6 P/E and strong liquidity position. That’s not necessary a bad bet to make: the continued struggles of Meta’s (META) Threads app to gain ground on X/Twitter despite the latter’s whirlwind of troubles shows the durability of a leading microblogging platform in the face of competitive pressures.

Investors need to be wary of related party and regulatory risks, but in exchange for taking on those risks, they can buy the company at less than half what Chairman Charles Chao paid in 2020. In the meantime there is a possibility of lucrative capital returns: Weibo paid a special dividend of $0.85 per ADS last summer, representing a 9% yield to today’s price. Ultimately, Weibo is a double-or-nothing stock, representing large potential value unlock through its operating earnings, cash, and investment portfolio relative to a low stock price, alongside equally significant risk, both geopolitical and company-specific.