Recent Weakness Looks Like a Buying Opportunity in Weibo Stock

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Weibo stock - Recent Weakness Looks Like a Buying Opportunity in Weibo Stock

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Escalating trade-war tensions between the U.S. and China have weighed on global markets. Specifically, they have killed high-flying Chinese internet stocks which investors think could be big losers if things get uglier between the two countries.

Notably, one of the best-performing China internet stocks, Weibo (NASDAQ:WB), has fallen off a cliff over the past few months. In February 2018, Weibo stock peaked above $140. Since then, it has fallen more than 35% to below $90.

The last time Weibo stock was this low was in August of 2017. Back then, quarterly revenues were running around $250 million, quarterly profits were running around $90 million, and the user base was around 360 million.

Today, quarterly revenues are running around $350 million (~40% higher), quarterly profits are running around $110 million (~20% higher), and the user base numbers more than 410 million (~14% bigger).

In other words, despite a 40% larger revenue base, 20% larger profit base, and 14% larger user base, Weibo stock is exactly where it was 10 months ago.

Does that make much sense?

No. Irrational fears surrounding escalating trade-war tensions are creating a lot of noise in Weibo stock, the sum of which simply presents a long-term buying opportunity for patient investors who understand the secular growth narrative in China’s digital ad industry.

Here’s a deeper look.

Weibo Is Supported by Strong Long-Term Growth Drivers

For all intents and purposes, Weibo is the Chinese Twitter (NYSE:TWTR). But whereas Twitter stock has soared over the past several months, Weibo stock has dropped.

That also doesn’t make any sense.

The digital advertising landscape in the United States, where Twitter gets most of its money, isn’t done growing, but it is slowing. Everybody is already online. A lot of the ad dollars have already migrated from the traditional channels to the digital channels. Growth rates from here project to be significantly less robust than they have been in past years.

The same is not true when it comes to Weibo and the Chinese digital advertising market. China is in the middle of an unprecedented consumerism and urbanization boom, the likes of which will power robust growth at Weibo for many years to come.

The logic is simple. The more Chinese consumers urbanize, the more they will have smart phones and other smart devices. The more they have those devices, the more they will become digitally engaged through social media platforms. As engagement transitions from traditional to digital mediums in China, advertisers will follow suit and flock toward digital channels with max engagement.

Weibo, as a digital channel for advertisers with over 400 million monthly active users, is naturally a big winner in this transition.

As such, Weibo is supported by powerful growth drivers which have staying power over the next several years. Trade-war tensions may slightly affect those growth drivers, but not in any meaningful way since Weibo is largely isolated to the domestic Chinese market.

Indeed, the numbers remain as strong as ever (75% revenue growth, 25% user growth, and 95% profit growth last quarter) and point to Weibo’s secular growth narrative through robust China digital advertising growth continuing into the foreseeable future.

Weibo Stock Is Worth at Least $100, And Likely Closer to $140

The math for Weibo stock being worth more than where it trades today isn’t that complex.

User growth is slowing from 30% and up over the past several years to 25% last quarter. But growth rates above 20% on a user base that is over 400 million implies that there is still a lot of room to grow. Indeed, China’s most popular social media app, WeChat/Weixin, has over a billion users, so there is a clear pathway for Weibo to substantially grow its user base from here.

Over the next five years, the user base should grow around 12% to 15% per year, implying a user base in five years of somewhere between 700 and 800 million. Last year, Weibo collected about $2.90 in average revenue per user (ARPU), and that was up 40% year-over-year. Moreover, last quarter, ARPU grew by even more (+45%).

Twitter’s total ARPU in fiscal 2017 was just below $7.50. It doesn’t take insane growth for Weibo to get to that level in five years. That would represent roughly 20% growth per year, versus today’s 40%-plus growth rates.

That seems achievable. Thus, I think ARPU can grow to anywhere between $6 and $8 over the next five years, which should lead to net profit margin expansion toward 40% (from 35% currently).

Thus, on the low end, I think Weibo gets to 700 million users in five years, achieves ARPU of $6, and runs at 40% profit margins.

That leads me to believe WB will earn at least $7 in earnings per share in five years. An average growth multiple of 20 times forward earnings on that implies a four-year forward price target of $140. Discounted back by 10% per year, that equates to present value in the mid to upper $90s.

And that is my low-end projection.

More realistically, I think Weibo gets to 800 million users in five years, achieves ARPU of $8, and runs at 40%-plus profit margins. Under those assumptions, I think a realistic five-year forward earnings target for Weibo stock is $10.50. Following the same math as above, that would yield a present-day value for Weibo stock of $140.

Bottom Line on WB Stock

Recent weakness is an opportunity. The most recent data we have on this company is that the secular growth narrative through robust growth in China’s digital advertising market remains as strong as ever. Thus, the recent selloff over trade-war tensions is mere speculation by traders who are thinking the worst.

At present levels, the worst is now overly priced in. But the worst likely won’t happen, and Weibo stock should rally off these lows.

As of this writing, Luke Lango was long WB.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/recent-weakness-looks-like-a-buying-opportunity-in-weibo-stock/.

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