Valuation worries cast shadow over Weibo

By Lin Chen Source:Global Times Published: 2014-4-24 20:53:02

Illustration: Lu Ting/GT



Weibo closed at $20.24 last Thursday, 19 percent above its US IPO price after slashing its offering size in an attempt to overcome tepid demand for momentum stocks. It continued to pop 11.7 percent on the second trading day. As investors are concerned about its long term performance, Weibo's stock price slowly dropped to $21.41 as of Wednesday with a significantly lower trading volume.

The Weibo IPO is seen drawing strong investor interest, as well as mixed opinions on its valuation.

Some observers had expected Weibo to be an IPO smash. "Either Weibo is incredibly undervalued, which we think it is, or Twitter is ridiculously overvalued because there's no metric or risk that applies to Weibo that does not apply to Twitter," Sam Hamadeh, chief executive officer of PrivCo Media LLC, said to Bloomberg.

Others show concerns about Weibo's profitability. The company had a loss of more than $47 million in the first quarter of 2014. Earlier, IPO Boutique downgraded its rating for the IPO, warning clients Monday that "Weibo's book is made up of fast money," and that "they are artificially high and they paint a far rosier picture than reality."

The company was founded in 2010, and has 129.1 million active monthly users in 190 countries and regions, according to its recent SEC filing. The same release says that the company has "become a cultural phenomenon" that has had a "profound social impact" in China. We are talking about a company with close to half of the Twitter's user base yet valued at one-sixth of Twitter. It is certainly interesting.

Despite its success on IPO day, Weibo is the baby in the bath water. We've seen a lot of weaknesses in tech and social media, especially in China.

Don't forget that the "Chinese Facebook", RenRen, made its debut surging 28 percent from its $14 IPO price on the first day of trading in 2011. It is now at $3.39.

In 2013, Weibo recorded almost $200 million in revenue, up 186 percent year-on-year, as well as an operating loss of $36 million before interest, taxes, depreciation and amortization. While the loss isn't good, the current path signals that the company could turn a profit in 2014. Advertising and marketing accounted for 78.8 percent of its revenue last year, supported by a strategic partnership with Alibaba. Game-related fees and VIP memberships followed up, contributing 12.2 percent and 5.9 percent of revenue respectively.

Looking elsewhere, as of 2013, each Twitter user was worth $110, Facebook user was $95 and Weibo user was around $30. Each active Weibo user contributes $0.38 to total revenue ($0.31 to advertising, or 81 percent). In contrast, each active Twitter user contributes $0.73 to revenue ($0.65 to advertising, or 89 percent). Essentially, each Weibo user generates about half as much revenue as each Twitter user, although Weibo's revenue model is more diversified than Twitter's. Game-related fees and VIP memberships may be the cash cows for Weibo down the road.

Based on current data, Weibo is trading at an enterprise-value-to-sales ratio of about 16, roughly in line with its nearest rivals. But while Weibo looks primed for future growth, and its tie-up with Alibaba is certainly appealing, intense competition within China's tech sector provides plenty of cause for alarm. Investors could just easily put their money into Tencent, for example, which is already China's leader in several Internet and mobile segments and has the potential to deliver higher earnings at a lower price.

The author is an assistant professor of marketing at Michigan State University. bizopinion@globaltimes.com.cn

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