Weibo Corp (ADR) (NASDAQ:WB) is a true investors’ conundrum. For value folks, this one is tough to touch. For momentum investors and those who like growth, however, WB stock is heaven-sent. And any decision on Weibo is further complicated right now by the fact that the Chinese social media company will report first-quarter earnings before Tuesday’s bell.
That has investors asking themselves a simple question in handicapping Weibo: Is it the next Facebook Inc (NASDAQ:FB) or the next Twitter Inc (NYSE:TWTR)?
First, let’s get the drawback of Weibo stock — valuation — out of the way.
While value investors typically gag at the first sign of a high valuation or a staggering run, many view a strong stock price as a positive sign. Still, new buyers likely will look at WB’s 54% year-to-date rally and 170% ascent over the past 12 months and get cold feet.
If that doesn’t do the trick, a price-to-earnings ratio of 130 and an insane 21 price-to-sales ratio will probably scream “stay away!”
That’s a lot to grapple with. But there are some positives that help make this kind of buy more palatable — fundamentally and technically speaking.
The Bull Case for Weibo
Let’s look at the charts first.
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With that said, Weibo stock has broken out to new highs, which typically puts a lot of other technical indicators to bed temporarily. With a move over $58 (teal line), Weibo has found nothing but air above it.
This is good news for the bulls. Moreover, while the stock is up considerably over the past 12 months, they’ve consolidated nicely since fall.
On the fundamental side, while WB stock does trade at 130 times trailing earnings, its forward P/E is at a much more reasonable 30. In other words, the Street is expecting significant earnings growth from here, thus the more digestible valuation.
Analysts expect EPS to grow by more than 61% this year, then slow down to “just” 50% in 2018. Over the next five years, EPS growth should average about 64% annually. Additionally, sales are expected to grow an impressive 50% this year and 36% next year.
Those are impressive numbers that investors will miss out on if they simply focus on a couple high valuation metrics. Is Weibo cheap? No. But that kind of growth shouldn’t be.
Bottom Line on WB Stock
So, what’s an investor to do about Weibo before and after Tuesday’s report?
Right now, Weibo is on a winning track and has broken out of its previous trading range. But first-quarter earnings could be a major catalyst in either direction.
If earnings disappoint, WB shares could drop back to previous resistance around $58 — about 8% lower. If investors react very bearishly, it could snap that level and start heading to its major moving averages, such as the 50-day at $52.50 (about 16% lower).
On the flipside, a strong report and subsequent rally would merely add fuel to the recent breakout and confirm the next leg higher, regardless of its overbought readings.
I don’t like to come across as wishy-washy, but Weibo is a tough call.
If you’re bullish, I would suggest buying a half-position now and the other half on a pullback. This way, you could still ride a continued rally in WB stock, but not be nearly as exposed to a downturn.
If you’re very cautiously bullish, you could wait for any pullback toward $58, whether it’s sparked by earnings or anything else. This would be the healthiest reaction, assuming the $58 level holds as support. If shares pull back without breaking below resistance, it will unwind Weibo’s overbought condition without damaging momentum.
If you’re bearish on WB stock, you’re looking for a break below that $58 level. That could trigger a world of hurt.
Bret Kenwell is the manager and author of Future Blue Chips. He can be found on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
