Weibo Corp (ADR) (NASDAQ:WB) is a 10-bagger. If you bought when WB stock fell to $10 in 2015, you’ve now made 10 times your investment.

Most of us didn’t get in on Weibo stock at the ground floor, though, so the question is: Is there still opportunity in WB stock today?

The bulls will point to the explosion of live streaming services in China. This has generated a windfall for Weibo, with revenues surging at a 70% annual rate. Bears will suggest this prosperity isn’t enough to justify the current stock price.

Let’s dive into the debate.

Reasons to Sell WB Stock

CFO Departure

Weibo’s investors received an unpleasant bit of news last week. The company’s CFO, Herman Yu, has left to “pursue other opportunities.” It didn’t take long to figure out why he left. On Monday, Baidu Inc (ADR) (NASDAQ:BIDU) announced that Yu would become their new CFO.

It’d be hard to fault Yu for the move. Baidu is a much larger company than Weibo. Still, it’s never good when an executive leaves, particularly at a company like Weibo with such explosive growth prospects. Yu represented the company well, and his successor will have a big challenge in communicating Weibo’s story as effectively to US-based investors.

Overvalued Versus Parent

Chinese internet company SINA Corp (NASDAQ:SINA) controls a majority of Weibo’s voting rights, and around 46% of Weibo’s outstanding stock. In addition to that, Sina has its own legacy businesses including, most notably, a popular Chinese web portal. Sina spun off part of Weibo to the public in an effort to earn a higher valuation. And it’s worked — arguably, too well.

Sina currently has an $8 billion market cap. However, once you take out its more than $1 billion net cash position, Sina’s enterprise value is just $6.8 billion. Weibo, by contrast, has a $23 billion market cap.

This implies that Sina’s stake in Weibo is worth more than $10 billion. Thus, the market is pricing the rest of Sina — including its portal business and $1 billion in cash — as having a negative value, to the tune of several billion dollars. This is irrational, and Sina is actively taking measures to try to close the valuation gap, such as distributing more WB stock to Sina’s shareholders. The message here is clear: if you like Weibo, you can get access to it cheaper through SINA stock.

Expensive Stock

WB stock isn’t just overvalued in comparison with its corporate parent. It is also overpriced on virtually all normal valuation metrics. The company sports a nosebleed 121 trailing P/E Ratio. The forward P/E of 41 is hardly reassuring either.

On an assets basis, there’s almost nothing tangible there; WB stock has an astronomical 25 price-to-book ratio. That could be problematic, given the Chinese government’s tendency to crack down on video and social media sites frequently. WB stock, in fact, fell on such a regulatory effort recently. High valuation stocks are risky in any case, and especially so when the business model faces significant regulatory risk. This author lost money in another Chinese video play, Xunlei Ltd (NASDAQ:XNET), due to a previous government crackdown.

Reasons to Buy WB Stock

Incredible Growth

As previously noted, WB stock is extremely expensive. Investors are paying up for a reason, though, Weibo is producing tremendous growth. Revenues are up from $66 million in 2012 to more than $800 million over the past 12 months.

If anything, the rate of growth is accelerating even more. For the second quarter, the company posted 72% revenue growth, handily beating already lofty analyst expectations.

Highly Profitable Business

Weibo is often called China’s Twitter Inc (NYSE:TWTR). That’s an unfair comparison, though, in at least one major way. Unlike Twitter, with its bloated cost structure and questionable management team, Weibo knows how to make a buck.

In Q2, Weibo recorded an incredible 80% gross profit margin. It produced $253 million in revenues, with just $50 million in direct costs (such as servers). After selling, general and administrative expenses (SG&A), Weibo managed a 35% profit margin, leaving a substantial $73 million after-tax net profit for shareholders.

Twitter, by contrast, earns just a 63% gross margin and, after its bloated overhead comes into play, loses money. Twitter produced $573 million in revenue last quarter, but lost more than $100 million in total. Weibo isn’t as big as Twitter (yet), but unlike its American peer, its cost controls have ensured that it has a viable shareholder-friendly business.

Powerful Partners
As mentioned above, Sina is the parent and still maintains a control position over Weibo. That’s a good thing, as Sina is a reputable and powerful firm in its own right. And Sina isn’t the only strong player supporting Weibo.

In fact, Weibo rose to prominence in large part due to its connection with internet giant Alibaba Group Holding Ltd (NYSE:BABA). Between 2013 and 2015, Alibaba accounted for more than a quarter of Weibo’s revenues. This percentage has since fallen as Weibo diversified its business. Still, Alibaba is Weibo’s largest customer.

And there’s more to the strategic alliance than just revenue. Alibaba invested more than $500 million in Weibo back in 2013, acquiring a large block of the company’s stock. And Alibaba’s CEO serves on Weibo’s board of directors. The ties linking these firms run deep.

Conclusion

The CFO’s exit aside, Weibo’s business is going full-steam ahead. Unfortunately, WB stock has run ahead of itself. Due to the unique situation with Sina, however, there is potentially a way to benefit from this situation.

Instead of buying WB stock at more than 100x earnings, you can buy SINA at around 35x earnings, getting access to Weibo’s parent, along with Sina’s cash hoard, portal business and investment portfolio in other leading Chinese internet firms. If Weibo continues to surge, SINA stock will go with it.

And if the past is any guide, Sina will keep distributing more WB shares to its owners, offering Weibo ownership at a discounted price. If Weibo’s stock comes back down, Sina will likely fall less, since it has more real assets supporting its share price.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.