Already up over threefold, Weibo Corporation (NASDAQ:WB) has a price-earnings multiple sure to scare away value investors. Yet Weibo continues to prove it has sustainable growth in the high double-digits. Users are more engaged, which drives revenue growth potential. Add in the company’s development of content feed and even value investors have to be impressed by the potential of WB stock.
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Double-Digit Growth in First Quarter
In the first quarter, Weibo reported revenue growth of 81% year-over-year, to $320 million. Revenue from advertising and marketing topped $276.8 million, up 77 percent YOY. Higher operating efficiency, as gauged by an operating margin of 41 percent, boosted the company’s returns.
User activity grew by 20% to 376 million monthly active users (MAUs). Since 96% of Weibo’s MAUs came from mobile devices, the company is clearly a solid mobile app play. Management attributed the strong user engagement and growth to the expansion of online marketing and promotional events in multiple cities in China. Weibo carried out its online marketing activities by cooperating with domestic smartphone manufacturers. In September, WB covered over 200 cities in China.
WB in a Sweet Spot
Weibo executed an aggressive user growth strategy that coincides with the trend of urbanization in China, which itself will progress towards more consumption of goods. Weibo is not limiting itself to consumers ready to spend. It targeted lower-tier cities by releasing a light version of Weibo. Though this app has fewer features, it has low resource needs on devices. Users may still consume content with ease and without any frustrations associated with having a low-end mobile device.
Enhancing Feed Algorithm
Similar to Baidu, Inc. (NASDAQ:BIDU) applying machine learning to enhance its news feed, Weibo is doing the same. By optimizing its machine-learning algorithm, the company is posting content that best fits its user. The personalized ranking system resulted in a 10% increase in social content consumption in the third quarter. Looking ahead, Weibo will continue developing its machine-learning algorithm, along with analyzing its user through data mining and content identification. That will lead to higher content consumption from its user base.
Video Consumption Grows
Baidu increased video consumption and so did Twitter, Inc. (NASDAQ:TWTR) with live sports streaming. Weibo pushed out more video, through a video recommendation engine, to users. In September, daily video views nearly doubled to 175% YOY and Weibo enabled its users to post HD (high definition) videos. Users love having the flexibility to post high-quality videos, as they may view videos in other, larger formats, including large-screen televisions. As the viewing and uploading of video grows exponentially, Weibo is poised to become the leader of short video sharing in China.
Weibo Stories
Unlike Snap Inc. (NYSE:SNAP), whose implementation of My Story failed to add meaningfully to its bottom line, Weibo Story grew to 40 million MAUs. Daily story posts have doubled since June. Weibo will enhance Story by integrating the feature with location data and user-interest data. Users also consumed Weibo’s live broadcasting. In cooperating with Yizhibo to obtain live video material, paying users on Yizhibo grew 45% from last year.
Strong Usage in Search
On top of all the strength from the video unit, Weibo’s Search products are also impressive. MAUs topped nearly 100 million in September. Though the company integrated instant payment with product search, it still needs to invest in Weibo Search before the product becomes a new revenue driver.
Valuation
Of the 10 financial finbox.io models built, some fair value calculations imply a share price of as high as $127 a share for Weibo stock.
Conversely, SimplyWall.St worries about the falling return on equity (ROE) and the lack of a dividend for a company worth $25 billion.
Still, Weibo stock looks strong. That said, value investors may want to wait for WB stock to pull back before assuming a position.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
