If you glance at the one-year chart of Weibo (NASDAQ:WB) stock, you’ll see that it has mostly trended downward. During this period, WB stock has gone from $140 to $53.50.
And even though tech stocks have attracted many buyers so far in 2019, Weibo hasn’t followed that trend. This week, WB stock has plunged by about 10%.
The main cause of the weakness this week was a downgrade of WB stock by Nomura Instinet from “buy” to “neutral.” Nomura, whose downgrade was very late, coming after the huge decline of WB stock, also cut its price target on Weibo stock from $74 to $64.
It’s true that WB does face some legitimate issues. U.S.-Chinese relations continue to be dicey, as there is buzz that the negotiations between the nations are going sideways.
In the meantime, the Chinese economy is decelerating. In Q4, its gross domestic product (GDP) grew by 6.4%, which was the slowest increase in 28 years. This is despite the fact that the Chinese government, using methods such as tax cuts and easier monetary policies, has been ramping up its efforts to stimulate the economy.
Yet despite all this, I still think the selloff of WB stock has been overdone. The fact is that the company has built a solid digital platform. It’s essentially the Twitter (NYSE:TWTR) of China, but it’s growing much more quickly than TWTR and has higher margins, giving WB stock an edge over Twitter stock.
Consider Weibo’s third-quarter results. The company’s net revenues soared by 44% year-over-year to $460.2 million, and its net income jumped by 63% to $165.3 million.
Moreover, WB continues to show strong user growth. In Q4, 70 million net monthly active users were added, pushing its total MAUs to 446 million.
A key part of Weibo’s success is that it has been laser-focused on its core competency: allowing people to discover and share news. As a result, WB has benefited from strengthening engagement trends and increased overall popularity. WB also has a strong balance sheet, as it has about $1.6 billion in the bank.
One good example of WB’s strategy is its investment in improving advanced recommendation algorithms, which enable it to promote much more relevant trending topics and content. Another factor that has strengthened WB is its strong video platform. In an effort to further enhance its video offerings, WB has been focusing on live broadcasting, which has become quite popular with its users.
The Bottom Line on Weibo Stock
Weibo will probably not be immune from the problems of the Chinese economy. Let’s face it, when growth starts to slow down, the first area that companies look to spend less on is advertising.
But Weibo stock still has a number of offsetting, positive catalysts. One such catalyst is the strong, continuous increase in the usage of digital platforms in China. In other words, companies will continue to spend more on internet ads, benefiting WB and, ultimately, WB stock.
Secondly, the valuation of WB stock is certainly much more attractive now than it was six months ago, as its forward price-earnings multiple is now 17. It seems that a great deal of top-line pressure is already baked into WB stock at its current levels. What’s more, Weibo stock is cheap compared to other Chinese internet companies like Alibaba (NYSE:BABA), whose forward price-earnings multiple is 23, and NetEase (NASDAQ:NTES), which has a forward price-earnings multiple of 30.
Granted, Weibo stock will likely continue to be volatile. But for investors looking for an interesting play on China — which has seen a steep drop in overall valuations — WB stock looks like a good choice.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
