At the start of this week, Weibo Corp (ADR) (NASDAQ:WB) was on fire, with shares up 94%. On Monday though, WB stock hit the turbo button, climbing 9.5% to new 52-week highs on seemingly no news. This was a picture-perfect breakout on heavy volume. The only problem? Weibo earnings are on Wednesday morning.
When stocks post big moves right ahead of earnings, it makes it tough for investors to get involved. Had investors wanted to own WB stock, it sure would have been nice to get long before watching it rally almost 10%.
The only thing worse than buying after a big rally would be to see it lose all those gains post-earnings.
WB Stock: The Fundamental Aspect
We’ll get to the technicals later. Admittedly, it’s hard to say investors should buy Weibo stock after such a big move. But that did little to change the fundamental aspects of the company.
The growth at WB is incredible. Analysts expect earnings to grow 83% this year, 55% next year and 50% annually for the next five years. On the revenue front, forecasts call for 60.4% and 42% growth in 2017 and 2018, respectively.
Despite all that, shares trade at “just” 37x forward earnings estimates. Obviously that’s a high valuation, but for a company with 50% revenue and earnings growth, that’s actually not a bad price. It’s at least one we can wrap our head around. Of course, it’s 10% more expensive than it was just one day ago.
Further, WB has beat earnings and revenue expectations for seven straight quarters. Before that, an in-line result was the worst Weibo had done when it came to analysts’ estimates. Assuming that stays the same, these growth estimates are likely too low.
Don’t forget about the operating environment, either. Companies like Alibaba Group Holding Ltd (NYSE:BABA), Wayfair Inc (NYSE:W), Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) have all turned in strong quarters.
While these companies are not exact peers to WB, it shows one common theme: Online service providers have been on fire lately. The underlying business, particularly in advertising, search and e-commerce, has strong momentum and that’s unlikely to falter anytime soon.
One alternative would be to buy a stock like BABA instead. For 26x forward earnings, investors get slower growth and a lower valuation. They still get exposure to China and the e-commerce trends. For Weibo’s part, the valuation is high, but its growth justifies it.
Trading WB Stock
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There’s one other key at play here: the shorts. Weibo carries a short interest north of 25%. With such a small float and strong business metrics, demand could easily outpace supply.
It makes me wonder if a short squeeze is what got the stock moving so much Monday. There was little news and plenty of volume and it’s odd to see a stock rally so much in one day, especially ahead of earnings. Part of me feels that rather than investors having a ton of confidence going into the report, it may have been shorts with very little confidence getting out.
The prior trend-line (orange line) would be support on a pullback. But WB stock is unlikely to tumble that far. If it falls, I would look for $80 to be support, the prior resistance level it blasted through Monday.
Shares are temporarily overbought (blue circle), but momentum remains handedly bullish (purple circle). Make no mistake about getting long: it’s high risk. Typically, I shy away from moves like this. I do not like rallies (particularly one-day, 10% ones) into earnings.
But WB stock has a lot of positives. Growth is good, the valuation is at least comprehensible, shorts are scrambling and the stock is strong. Again, it must be stressed that WB stock by no means is a risk-free trade. If anything, investors can wait for the report and then go long if they like the results. They can also consider buying a half position now and waiting for the results.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.
