Weibo Corp. (WB) reported better than expected Q2 earnings, highlighting an improving outlook for one of China’s largest social media players. Despite a challenging environment for online ad sales in recent years and further pressured by the COVID-19 pandemic, the micro-blogging platform continues to see a growing user base and consistent profitability. We expect conditions to improve going forward and see Weibo well-positioned to capitalize on its market leadership position. Notably, the stock trades at a discount to peer group in the sector, representing the deep value as a potential turnaround play. We are bullish on shares of WB which present solid fundamentals and see more upside over the next year as the company gains operating and financial momentum.
WB Q2 Earnings Recap
Weibo reported its fiscal Q2 on September 28th with non-GAAP EPS of $0.50, which was $0.04 ahead of estimates. Similarly, GAAP EPS of $0.86 represented a beat of $0.47 based on a recognition of a positive fair value adjustment to its investment portfolio. Revenue of $387 million in the quarter was down by 10.3% year over year, or 7% lower on a constant currency basis, but stronger than expected by $6.8 million.
(Source: Company IR)
The story here has been some continued weakness in online advertising which was disrupted by the COVID-19 pandemic going back to January in China. Small and medium-sized businesses pulled back on marketing with some industries still lagging even as the Coronavirus is largely controlled in the country. Favorably, conditions have improved sequentially in recent months and management is more optimistic about trends going forward.
One of the positive trends during the quarter was strong momentum from the Alibaba Group Holding (BABA) marketplace related advertising up 48% year over year. The Chinese e-commerce giant now represents about 9% of firm-wide revenues. Weibo sees this area as a continued growth opportunity with data showing good sales conversion for merchants as the two independent platforms are integrated through corporate cooperation. From the conference call:
This is also well demonstrated in the ad revenues from Alibaba, which grew 48% or 53% on a constant currency basis to $35.7 million in the second quarter. Besides this, as the pandemic further fueled ad budget shift from offline to online, we saw increasing adoption of our innovative ad product offerings such as online product launch solution from handset and automobile sector this quarter. In the coming quarter, leveraging the marketing opportunities brought forth by the ecommerce seasonality, we will further integrate our resources and strengthen our cooperation with Alibaba to drive value for the ecommerce merchant.
(Source: Company IR)
Operating metrics are strong. Weibo monthly active users “MAUs” during the quarter at 523 million represented a net addition of 37 million compared to the period last year. An increase of 18 million daily active users “DAUs” year over year to 229 million suggests the platform remains vibrant.
The expectation is that strength from e-commerce related marketing can balance weakness from other industries that remain sluggish, notably travel and entertainment. Revenues related to value-added service “VAS”, which includes live-streaming specials and corporate sponsorships, declined by 24% year over year. Weibo believes that as large scale public events like music concerts and conferences return, VAS can recover some of that business through 2021. Management’s strategy is to focus on ad performance and efficiency. From the press release:
“With the COVID-19 pandemic situation in China largely brought under control, we are glad to see the solid recovery of our brand advertising business in the second quarter, with more brands embracing our differentiated social marketing solutions to connect with broader audience on Weibo,” said Gaofei Wang, CEO of Weibo. “For performance ad business, we focused on enhancing ad performance and efficiency through upgrade of advertising system and product optimization, aiming to capture higher wallet share in the performance ad market,” said Mr. Wang.
It’s important to note that Weibo maintains a strong balance sheet position and no net-debt. The company ended the quarter with cash equivalents and short-term investments of $2.33 billion. Considering the total long-term financial debt of $1.65 billion, the company is net-cash positive. The company also generated $113 million in free cash flow during the quarter highlighting what we see as solid fundamentals.
Management Guidance and Consensus Expectations
While not offering full-year guidance or earnings estimates, management expects current Q3 revenues to decline between 5% and 7% year over year on a constant currency basis. This softness reflects continued challenges among key industries which are recognized as key-account “KA” and still impacted by the pandemic. Comments in the conference call suggest that organic trends beyond particular sectors still dealing with ongoing disruptions are showing more positive brand sentiment.
Entering into the third quarter, we saw the overall brand sentiment has turned more positive backed by the stabilization of pandemic situation and improvement of the macro environment, especially the consumption side. As mentioned earlier, key sectors of brand business such as FMCG, automobile and handset continued to book healthy growth trends in the third quarter. But on the flip side, despite some sequential pickup, sectors like entertainment are still on a descending trend, given the relatively weak market demand compared with same period last year. At this moment, assuming no further impact from the pandemic in the coming quarter, we expect the KA business to continue to improve sequentially with the stronger demand fueled by the ecommerce seasonality.
Consensus market expectations are looking ahead to what should be a stronger 2021 and 2022. Compared to an estimate of an EPS $2.12 this year, the market sees Weibo EPS climbing 21% in 2021 to $2.57 and again 12.8% in 2022 to $2.90. Revenues may approach $2 billion by 2022 averaging double digits over the next two years. Keep in mind that these published full-year estimates are from before the latest earnings release. By this measure, we expect the revisions higher given the better than expected Q2 earnings.
(Source: Seeking Alpha)
Analysis and Forward-Looking Commentary
Going back to early 2018 when WB stock price traded as high as $140 per share, the last couple of years have been disappointing for shareholders as the stock is now down by nearly 75% from that level. Intense competition in the online advertising market in China forced a reset of expectations as Weibo exhibited weaker than expected growth. Still, it’s encouraging that the company has remained profitable over the entire period and there are several reasons to like the stock here at the current level with more compelling value.
At the core, this is a turnaround story as the company has made progress over the past year to streamline the business and focus on efficiency even as the pandemic caused an unfortunate setback. Efforts to enhance video content on the platform and support social media creators have given a new life to the micro-blogging service.
Weibo draws parallels to Twitter Inc. (TWTR) from the U.S. and shares the social media landscape in China with larger Tencent Holdings’ (OTCPK:TCEHY) “WeChat” that is more akin to features found on Facebook (FB). We note that Tencent Holdings includes separate businesses in gaming, fintech, and other digital properties along with the social media platform “QQ” so it’s not necessarily a direct comparison. What we like about Weibo is the apparent value in the stock compared to these other publicly traded social media peers that we also include Snap Inc. (SNAP).
One of the recent developments in the market is U.S. and China tensions related to technology company regulations. What we like about Weibo is that it avoids any of this controversy by not operating in the U.S., focusing only on its regional market.
WB is currently trading at 4.7x sales which is at a significant discount compared to TWTR at 10.5x, Tencent at 10.4x, FB at 9.8x, and Snap Inc. at 19.0x. In some ways, this lower multiple is justified given the weaker growth this year but we still think the ongoing profitability, solid balance sheet position and market leadership highlight its core strength. WB also trades at a discount in terms of its P/E ratio and price to free cash flow. For reference, Snap Inc. is not currently profitable and free cash flow negative.
More importantly, the forward multiples based on consensus estimates look even more compelling. Considering the full-year 2021 EPS estimate of $2.57, the 1-year forward P/E ratio for WB at 14x looks cheap in the context of a stock that could be growing revenues by double-digits and earnings growth of more than 20% next year.
The bullish case for WB is that if management can successfully accelerate earnings, the stock can have a significant upside to converge with valuations of its peer group. We rate shares of WB as a buy with a price target of $45.00 per share, representing a 2021 P/E of 17.5x based on current consensus.
The main risk to watch here is the possible deterioration of the global macro environment threatening the recovery of China’s online advertising market. Weaker than expected revenue numbers for Weibo would be seen as a disappointment and force revisions lower to long-term earnings estimates. For the upcoming quarter, monitoring points include trends in the company’s value-added-services which we expect to improve along with financial margins.
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Disclosure: I am/we are long WB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.