In addition to blowout numbers from e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA), the market also got a very strong quarter from social media platform Weibo Corp (ADR) (NASDAQ:WB). In fact, WB earnings were so good (yet another clean beat-and-raise quarter) that WB stock rocketed to all-time highs. It now trades over $107 and has rallied 130% over the past year.
The China Internet growth narrative remains red hot. But this huge run in WB stock isn’t over. In fact, I think WB stock could still nearly double over the next 5 years.
Here’s why.
WB Earnings Underscored A Red Hot Growth Narrative
Often dubbed the Twitter Inc (NYSE:TWTR) of China, Weibo is a pure-play on the red-hot China internet growth narrative.
This growth narrative is still in its early innings.
China’s middle class is growing and urbanizing. A critical part of this urbanization is the mass proliferation of smartphone and social media usage. Look no further than the stock charts of Weibo and Tencent Holdings Ltd (OTCMKTS:TCEHY) to understand that this is an accelerating growth story.
WB earnings also underscore that this growth story is still in its early innings. WB reported that the monthly active user base had swelled to 376 monthly active users in the third quarter, up 15 million sequentially. Last third quarter, WB also added 15 million new users. The third quarter before that, WB added 10 million new users.
Clearly, there is reason to believe that this growth narrative is actually getting better.
In fact, smoothing out for seasonality in net adds, Weibo is on a multi-quarter trend of adding roughly 20 million new monthly users per quarter (which has been translating to roughly 30% year-over-year growth, give or take a few percentage points). That is pretty strong growth, and it won’t slow anytime soon.
The combined user count at Tencent’s WeChat and Weixin was 963 million last quarter.
Weibo likely won’t hit a billion users any time soon. Tencent’s WeChat and Weixin were adding roughly 40 million users per quarter when they had around 350 million monthly actives (comparable size to Weibo currently). That is essentially double the user add growth rate of Weibo.
But Weibo is on track for current growth rates to sustain themselves for a long, long time. Currently, it feels like the longevity and magnitude of this growth narrative is being underappreciated by the market.
The Math for Big Returns on WB Stock
Considering WeChat and Weixin are near a billion users while Weibo is at just 376 million users, I think it is conservative to assume that Weibo will be able to keep adding roughly 20 million new users per quarter.
If that trend sustains, then Weibo is looking at 800 million monthly actives in 5 years.
Average revenue per user (total revenue divided monthly user count) was about $2 last year. It is trending up huge this year (30%-plus), so I think it is safe to say average revenue per user grows at around 20% per year over the next 5 years. That puts average revenue per user at $5 in 5 years.
Average revenue per user of $5 on 800 million monthly actives puts revenues at $4 billion in 5 years.
At scale, Weibo should be able to achieve net profit margins in-line with Facebook Inc (NASDAQ:FB), whose profit margins are currently above 40%. A 40% net profit margin on $4 billion in revenues implies $1.6 billion in profits in 5 years. Assuming a 230 million diluted share count, that would equates to earnings per share of just under $7.
At that point in time, Weibo’s user growth should look something like 10-15% (versus 30% currently). Facebook is growing its monthly active user base at 16% year-over-year. That 16% growth is being awarded a 35x trailing earnings multiple.
Weibo’s 10-15% growth, then, should be awarded something like a 30x trailing earnings multiple. A 30x multiple on $7 earnings implies a five-year forward price target of $210.
Bottom Line on WB Stock
Some simple, back-of-the-envelope math with conservative growth estimates supports WB stock nearly doubling over the next 5 years.
I think that means you buy WB stock here. The growth story is ramping with the China internet growth narrative, the valuation is reasonable, and the stock could fly higher even if user and unit revenue growth rates naturally come down.
As of this writing, Luke Lango was long WB, BABA, and FB.
