Weibo Corp (ADR) (NASDAQ:WB) is soaring on Wednesday with WB stock up more than 8% as of this writing. The catalyst is a strong fourth-quarter report, in which revenue and earnings both came in well ahead of Street expectations.
The numbers support the optimism of Tom Taulli, who argued last week that investors should buy Weibo stock on the dip. And they suggest more upside, at least in the near term.
The company often called the Chinese version of Twitter Inc (NYSE:TWTR) now has roughly the same enterprise value as its U.S. counterpart – despite a larger user base and more impressive growth. WB stock still has another 6%+ left in gains to reach a new all-time high, and that seems a reasonable goal after Q4 results and Q1 guidance.
Where Weibo stock gets a bit trickier in is mid- to long-term. It does seem like Chinese regulators have been targeting the space of late. Chinese issues as a whole seem a potential selling target if the broad market again gets nervous.
Indeed, Alibaba Group Holding Ltd (NYSE:BABA), the most valuable U.S. listed Chinese stock, has dropped 13% from late January highs. And it seems wiser to own Weibo through its parent Sina Corp (NASDAQ:SINA), rather than directly.
I do think WB stock still has some upside ahead, and, again, Q4 numbers are impressive. But investors in Weibo stock at the least need to be aware of the risks.
Q4 Earnings
Certainly, the numbers don’t make Weibo stock look like a risky play. The company posted a blowout Q4. Revenue of $377.4 million rose 77% year-over-year, beating guidance of $355-$365 million and consensus estimates of a ~70% increase. Both advertising and value-added services (game fees, data licensing and other streams) rose sharply.
Adjusted EPS nearly doubled to $0.64, nicely ahead of Street projections for $0.58. For the full year, non-GAAP EPS rose 120% to $1.80. And revenue guidance for Q1 of $335-$345 million crushed estimates of just $303.1 million.
Fundamentally, it’s a strong quarter. And the comparison to Twitter — whose stock has soared of late — is enlightening. Twitter closed 2017 with 330 million MAUs (monthly active users), up 3.4% year-over-year.
Weibo finished with 392 million — more than 25% more than it had a year ago. And yet, backing out net cash, both companies have essentially the same enterprise value.
That would seem to set up more upside for Weibo stock unless there’s a reason its users are less valuable than those of Twitter.
The Concerns Facing WB Stock
It’s possible that’s the case. Weibo is growing faster than Twitter at the moment – but it’s also not yet as profitable. Weibo’s Adjusted EBITDA for 2017 was $471 million, against $863 million for Twitter. But backing out Twitter’s ridiculously high stock-based compensation, the figures actually are somewhat similar.
That leaves a question for investors, then. Would they rather own faster-growing earnings in China, or slower-growing earnings in the U.S.? It’s not a simple question. China’s regulators targeted Weibo’s platform earlier this month, to the point of suspending a few key services.
The pressure on social media isn’t new: Weibo has been fined in the past, as have fellow operators Baidu Inc (ADR) (NASDAQ:BIDU) and Tencent Holdings Ltd (OTCMKTS:TCEHY). But that pressure seems to be increasing, and country risk is worth considering here.
The other question is whether WB stock is the right play to own Weibo. As Dana Blankenhorn detailed back in October, Sina offers cheaper ownership of Weibo. A hedge fund is trying to unlock that value, so far unsuccessfully.
Overall, the situation is similar to that of Yahoo! and its Alibaba stake, which eventually ended with the Altaba Inc (NASDAQ:AABA) spinoff and a deal with Verizon Communications Inc. (NYSE:VZ).
What Q4 shows is that Weibo is doing a fantastic job of managing what is in its control. The business is running on all cylinders, and it is dominating the social media space in China. But investors need to keep in mind what Weibo can’t control as well. It’s there that the risks to WB stock are most prevalent – and most difficult to predict.
As of this writing, Vince Martin has no positions in any securities mentioned.
