Deep-dive 2020-6: Weibo Corporation
Weibo Corporation (WB US) is a Chinese social media platform that reminds us of Twitter. Just like Twitter, Weibo is a public platform that influencers can use to reach their fans, for the government to reach citizens, where journalists can release their news articles and where individuals can share their ideas with the world.
Weibo's strength is the network effect it has in being the largest public social media platform in China, with over 500 million users. Key opinion leaders are attracted by the massive user base, and users are attracted to the people and the information available on the platform. No-one has been able to compete with Weibo – not even Tencent.
In 2018 and 2019, Weibo suffered by an advertising inventory oversupply driven by a massive ramp-up in advertising on Bytedance's platforms. But Bytedance has already finished ramping up its ad load. In early 2020, COVID-19 also hit advertising revenue hard. But promising new vaccines suggest that economy-wide consumption patterns might soon resume, which will help the advertising market recover.
With over 500 million monthly active users and an enterprise value below $10 billion, we think that the market underestimates the potential of the Weibo platform. Weibo's ad load is only 7-8% vs Toutiao's and Facebook Asia's 12%. In addition, Weibo's CPM and cost-per click are significantly below those of Toutiao. Altogether, there should be scope to increase revenue / MAU by about 100%. In addition, monthly active user numbers continue to grow almost 10% per year.
Using the above assumptions, as well as a target EV/EBIT ratio for 2024 of 10x, we get an intrinsic value of $71/ADR - suggesting an upside potential of +61%.
The main risks with Weibo involve the enforceability of VIE contracts, risks of further government intervention as well as related party transactions. But none of them are significant enough to detract from the main investment case.
Near-term catalysts include a vaccine treating COVID-19 and thus helping the advertising market to recover. Second, we believe that Weibo's management team will try to monetise the platform in preparation for a Weibo listing in Hong Kong or a relisting of Sina on either the mainland or in Hong Kong.
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The above article and PowerPoint presentation constitute the author’s personal views only and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – we do hold a position in Weibo at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).
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