Editor’s note: This article is part of InvestorPlace.com’s Best Stocks for 2019 contest. Kyle Woodley’s pick is Weibo (NASDAQ:WB).
It feels greedy to complain about an 18% return after a little over three months. But that gain doesn’t sound nearly so sweet when you consider that parking the bus in the S&P 500 would’ve netted you about 15%.
When you invest in a growth-y, emerging-markets play such as Weibo (NASDAQ:WB), you’re simply hoping for much, much more than a couple of points of market outperformance.
But none of this should come as a surprise. Weibo has been running with the same script that held it back in 2018, and that I mentioned in the introduction to my Best Stocks for 2019 pick.
The good news is, things finally might be on the verge of turning around for WB stock.
Weibo Keeps Doing Its Job
A quick refresher: Weibo shares hemorrhaged 43.5% in 2018 – a year in which the company also grew revenues by 49% year-over-year and net income by 54% year-over-year.
Sure, investors didn’t have the benefit of knowing the results of Weibo’s final quarter during calendar 2018. But the stellar annual results didn’t come out of left field. Everyone paying attention saw that the Chinese microblogging and social media company was on pace for a special operational year.
By the by, here’s what Weibo’s fourth quarter — announced in March — looked like:
- Revenues: $481.9 million (+28% YoY)
- Ad & Marketing Revenues: $470 million (+35% YoY)
- Non-GAAP Net Income: $183.6 million (+26% YoY)
- Non-GAAP Net Margin: 38%
- Monthly Active Users (December 2019): 462 million (+18% YoY)
- Average Daily Active Users (December 2019): 200 million (+16% YoY)
If you’re going to pick Weibo apart on anything — and investors certainly did, considering the sharp selloff after its Q4 report — it might be the company’s revenue forecast. WB is looking for Q1 sales growth of 20.5% to 23.5%, which doesn’t sound like much compared to Q1 2018’s 76% jump in revenues.
But it sounds a lot better than what the average S&P 500 company is expected to deliver over the next couple months. FactSet is estimating a mere 4.8% year-over-year revenue growth rate for Q1.
In short: Weibo is continuing to grow like a weed. That’s not the problem. China itself is … or perhaps, was.
Watch China to Understand WB Stock
As I mentioned in my introduction to WB stock, Weibo suffered the same fate a lot of Chinese equities did in 2018: Pessimism about China’s economy drained the bathwater and took a lot of babies with it. I wrote back in December:
“Everyone’s well aware of at least one of the woes: China’s tariff standoff with the United States. But there have been numerous other worries, such as the deep fourth-quarter declines in oil and other energy prices, slowing growth that has shown up in disappointing GDP figures (Q3’s 6.5% growth is the worst since 2009) and the rollout of policies to spur commercial banks to lend to private Chinese companies that is being seen negatively — as a form of protective stimulus rather than a growth measure.”
This year hasn’t been entirely different, with spotty Chinese economic data points popping up here and there. But the potential for a tide change in China to lift stocks like Weibo became evident over the past few days, as a couple clouds began to lift.
The U.S. appears to be closing in on a trade deal with China. We’ve heard this before, of course — several times — but optimism typically wins out until a potential deal collapses.
The most recent comments from U.S. officials hint that we might be in for the same kind of tease again. Myron Brilliant, executive vice president for international affairs at the U.S. Chamber of Commerce, told Financial Times, “Ninety percent of the deal is done, but the last 10% is the hardest part, it’s the trickiest part and it will require trade-offs on both sides.”
But you know Wall Street is clinging to that “ninety percent.”
Meanwhile, China’s manufacturers returned to growth in March after four months of contraction, according to a Caixin/Markit survey. And Chinese services-sector activity last month hit its highest point in a year.
It’s no coincidence that WB stock has popped 19% in just five days. Investors know that Weibo is a sparkplug, but they need to regain confidence that China broadly won’t slow down even more, hampering Weibo’s still-lofty growth expectations.
Right this minute, things are looking up for my Best Stocks contest pick.
Kyle Woodley is senior investing editor of Kiplinger.com. He currently is long WB and short patience.