I’m bullish on the China internet growth story. It seems that the narrative of China’s middle class growing and getting a modern makeover is still in its early innings. That’s why Chinese internet stocks have simply taken off recently. One of my favorite ways to play this trend is Weibo Corp (ADR) (NASDAQ:WB). Weibo is often labeled as the Chinese Twitter Inc (NYSE:TWTR). Growth has been on fire this year, and that is why WB stock is up nearly 150% so far in 2017.
But there is more room to run in this super-charged growth stock.
Here’s why.
China Internet Stocks Are On Fire
The China internet growth story has gained some serious traction this year. China’s middle class is growing and urbanizing. That means the consumer dynamics of China are starting to look a lot like the consumer dynamics of America. That also means the companies in China are starting to look a lot like the companies in the Western World.
Amazon.com, Inc. (NASDAQ:AMZN)? China has Alibaba Group Holding Ltd (NYSE:BABA).
Shopify Inc (US) (NYSE:SHOP)? China has Baozun Inc (ADR) (NASDAQ:BZUN).
Alphabet Inc (NASDAQ:GOOG)? China has Baidu Inc (ADR) (NASDAQ:BIDU).
Facebook Inc (NASDAQ:FB)? China has Tencent Holdings Ltd (OTCMKTS:TCEHY).
Twitter? China has Weibo.
As China’s middle class continues to grow, these Chinese tech giants will start to look more and more like their multinational counterparts.
But in Weibo’s case, they don’t want to look like Twitter. Why? Because Weibo already has more users than Twitter. And it is growing its user base at a 30% year-over-year clip. Twitter’s user base grew by 5% last quarter.
But Weibo only has 361 million monthly active users. The combined user count at Tencent’s WeChat and Weixin was 963 million last quarter.
Why can’t Weibo get to about a billion monthly users? I think it can. After all, if we take the U.S. market as a precedent, then it is obvious that people concurrently use more than one social media app. U.S. consumers often have some combination of Facebook, Instagram, Twitter, Snapchat and LinkedIn.
The same will be the case in China. Weibo and WeChat complement one another. One (WeChat) is more of a private communication app, like WhatsApp. The other (Weibo) is more of an open communication forum, like Twitter. The two are complementary.
Why Weibo Stock Will Head Higher
Here’s the math for big returns.
Given WeChat and Weixin have nearly a billion users right now and that the user base is growing 20% year-over-year, I think it is very likely that: 1) Weibo has a billion users in 5 years, and 2) Weibo’s user base growth rate in 5 years will be in the 15% to 20% range.
Last year, Weibo’s average revenue per user (or ARPU, calculated as annual revenue divided monthly users) was about $2. That should easily grow to $4 in 5 years. A billion users and ARPU of $4 implies revenues in 5 years of about $4 billion.
Net profit margins were about 28% last year. They are growing rapidly this year. Weibo should be able to grow net profit margins to around 40% in 5 years (Facebook’s net profit margins were about 42% last quarter).
A 40% net profit margin on $4 billion in revenues implies $1.6 billion in net profits in 5 years. Assume diluted share count is about 230 million, and you get to earnings per share of just under $7 in 5 years.
If Weibo is growing its user base around 15% to 20% at that point in time, then it will look a lot like Facebook does today in terms of user growth. FB stock currently fetches a trailing earnings multiple of around 38-times. I think it is safe to say WB stock fetches a 30-times trailing multiple in 5 years.
A 30-times multiple on $7 EPS implies a 5-year price target for WB of about $210. That represents annualized returns of about 16%.
Bottom Line on WB Stock
If you believe in the China internet growth story, then you believe Weibo can grow its user base to about a billion users in 5 years. If you believe Weibo can grow its user base to that size in 5 years, then you believe WB stock is a compelling buy here.
I’m in the bull camp on this one. China is no small market (about a fifth of the world’s population) and WeChat’s huge size shows that this demographic is ready to adopt social media en masse.
Consequently, I think WB stock more than doubles over the next 5 years. This party is just getting started.
As of this writing, Luke Lango was long WB, BABA, BZUN, FB, GOOG, SHOP, and AMZN.
