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Shares of SINA (NASDAQ: SINA) fell 7% on Aug. 8 after the Chinese internet company reported its second quarter earnings. Yet the decline, which brought SINA to a 52-week low, seemed unjustified, as the company easily beat analyst estimates.
SINA’s non-GAAP revenue rose 50% annually to $537.4 million, topping expectations by over $2 million. This calculation was based on the new ASC 606 accounting standard, which wasn’t used last year. On the old ASC 605 basis, SINA’s non-GAAP revenue would have risen 52% to $540.1 million. On a GAAP basis, SINA’s revenue rose 50% to $534.8 million.
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On the bottom line, SINA’s non-GAAP net income rose 26% to $66.5 million, or $0.89 per share, beating estimates by $0.20. On a GAAP basis, its net income rose 50% to $35.1 million, or $0.47 per share.
SINA’s management reiterated the company’s prior guidance for 14.5 billion to 15.5 billion RMB ($2.13 billion to $2.27 billion) in revenue for the full year. That represents 36%-45% sales growth in dollar terms, and matches analyst estimates for 43% growth.
At $75, SINA trades at just 16 times next year’s earnings — which seems very cheap relative to its growth potential. SINA also announced a fresh $500 million buyback plan that will last through the end of 2019. $500 million is equivalent to about 9% of SINA’s market cap, so a big buyback would make the stock even cheaper.
Despite all those tailwinds, shares of SINA remain down 25% for the year. Let’s take a closer look at SINA’s second quarter numbers, the bearish headwinds holding it back, and why it could rebound in the near future.
Evaluating SINA’s core growth engines
SINA still generates the lion’s share of its revenues from Weibo (NASDAQ: WB), the social network it spun off in 2014. SINA retained a major equity stake in Weibo and maintained majority voting rights at the company. Weibo’s monthly active users (MAUs) rose 19% annually to 431 million last quarter, and its daily active users (DAUs) also grew 19% to 190 million.
SINA generates the rest of its revenue from its older portal sites, which are integrated into Weibo’s ecosystem and include newer ventures like its fintech unit. Both SINA’s Weibo and Portal units grew year-over-year, but SINA’s overwhelming dependence on Weibo is obvious:
Q2 2018 Revenue
SINA is also heavily dependent on advertising revenue, which rose 54% annually to $454.1 million during the quarter. Its Weibo advertising revenue rose 69% as its Portal advertising revenue grew 8%. Meanwhile, SINA’s non-advertising revenues — which come from value-added services, its fintech unit, and other newer businesses — rose 31% to $93.3 million.
The expansion of SINA’s advertising and non-advertising platforms isn’t cheap, but its gross margin rose six percentage points annually to 80%. However, a large portion of that gain was attributed to its shift to the ASC 606 accounting standard. On the old ASC 605 basis, its gross margin would have only risen slightly, from 74% to 75%.
Why did investors sell SINA?
SINA’s core growth numbers look solid, but concerns about rising expenses, currency headwinds, and the softer demand from SMEs (small to medium-sized enterprises) spooked investors. SINA’s non-GAAP operating expenses rose 81% to $272.1 million during the quarter. That caused its non-GAAP operating margin to drop two percentage points annually to 30%. On an ASC 605 basis, its operating margin would have dipped from 26% to 25%.
Those declines seem minor, but investors likely think that tougher competition from Tencent‘s WeChat, the biggest mobile messaging app in China, could force SINA to respond with higher spending.
The midpoint of SINA’s full-year sales guidance also came in slightly lower than the average analyst estimate due to a weaker RMB and tougher competition in the SME space. Lastly, escalating trade tensions are making it tough to own many Chinese stocks.
Why SINA could make a comeback
SINA is definitely undervalued in the $70s, and should rebound once trade tensions abate and investors realize that both SINA and Weibo will remain major advertising platforms in China. Moreover, Weibo remains an ideal takeover target for Alibaba, which owns the second largest stake in Weibo after SINA. If Alibaba wants Weibo, it must take control of SINA — which looks like a bargain at its current valuation.
Therefore, SINA investors could be in for some short-term pain, but I think its long-term growth prospects remain bright.
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