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Morningstar | Planning to Reduce FVE for Narrow-Moat Sina by Mid- to High Teens; Shares Under Review

We expect to reduce our 2018-20 net revenue growth forecast for Sina as a result of weaker-than-expected implied fourth-quarter guidance, driven by weaker advertising demand amid a slowing economy, strengthening competition, and increasing ad load in China’s advertising space. Given our long-term investment horizon, we expect the near-term weakness will be partly mitigated by an expected recovery in the economy and therefore advertising demand in 2021 and 2022. Still, this is expected to result in a mid- to high-teens reduction in our previous fair value estimate of $131 per share.

Sina’s most important asset, Weibo, will see its advertising affected by a pause in game approvals, as gaming is one of the largest verticals of Weibo’s small and medium enterprise business. Further, weak macro conditions have put pressure on advertising in auto services, weddings, and certain consumer sectors with higher ticket sizes. Meanwhile, the slowing growth of Internet users and the rise of Internet competitors such as ByteDance will put pressure on user engagement at Weibo. To remain competitive, Weibo will require a higher-than-expected sales and marketing ratio, in our opinion, despite management’s guidance that operating margin in 2019 can remain flat.

Sina’s net revenue growth guidance is 32%-34% for 2018 or 10%-16% for the fourth quarter, missing our estimate. Sina’s third-quarter net revenue was up 26% year over year, a sharp deceleration from 50% in the second quarter and 59% in the first quarter due to slower advertising and marketing revenue growth of 48% at Weibo. Portal advertising revenue was down 15% year over year, registering a decline for the first time since the second quarter of 2017.

Overall non-GAAP operating margin was 30.2% versus 29.6% in the second quarter and 32.7% in the third quarter last year. Operating margin was 22.9% in the third quarter versus 25.3% in the year-ago period. Based on our calculation, the portal and other business registered an operating loss of $39 million in the quarter, widening from $23 million in the second quarter. Weibo’s monthly active users grew 19% year over year and 3.5% sequentially, similar to the growth in the second quarter, and exceeded our expectations.