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Morningstar | Narrow-Moat Weibo Remains Undervalued for Long-Term Investors Despite Near-Term Weaker Performance. See Updated Analyst Note from 22 Jan 2019

We have reduced our 2018/2019/2020 revenue growth assumption of narrow-moat Weibo to 49%/18%/10% from 53%/28%/18%, respectively, to factor in weaker economic growth, resulting in reduced advertising budget from corporate in 2018, stronger competition in the advertising market, and unfavorable exchange rate. We expect non-GAAP operating margin to trend down to 38.7% in 2018 and 37.0% in both 2019 and 2020. We assume an acceleration in revenue growth rate to 25% in 2020 and 2021 and non-GAAP operating margin increase to 38.7% in 2021 and 40.3% in 2022 as the economy recovers. We expect regulatory pressure to have one-off impact and the government is rolling out measures to support the economy.

Our fair value estimate has been reduced to USD 84 per share from USD 93 per share and we believe Weibo is still undervalued, as the company is proactively adopting measures to strengthen its content ecosystem and maintain its strong network effect.

Weibo’s customers in various industries are under pressure. Tighter regulations on tax evasion and content supervision in the entertainment industry put pressure on the industry. The reduction in salaries to online actors have indirectly reduced the advertising budget of the entertainment industry, which is a fixed percentage of the overall costs of content. The gaming segment suffered from the license approval process halted last year. The approval process has resumed, though games released by Tencent and Netease, two clients with higher contribution to Weibo revenue, are not in the list. However, we expect to see approval to continue to come through. The computing, communication, consumer electronics (3C), home appliances and Internet services clients are seeing slower growth. The shipment of smartphones in China was down 20% in the fourth quarter last year. The home appliances sectors faced a downturn due to property purchase limit and reduced property transaction volume, discounting prices of home appliances. We have seen more cities with easing regulations in the property sector that will help the home appliance market. The government has also called for more support toward the home appliance market. As a result of these weaknesses in demand, Weibo’s peers such as Baidu have also increased their efforts in selling to their advertising clients.

To strengthen its positioning in short form videos which are gaining user time spent share in the China Internet space, Weibo rolled out a new version of Weibo APP on Jan. 1 which puts videos at the main entrance of the APP. The videos content are premium videos with IPs in series, similar to Youtube channels. We think that will allow users to subscribe to their favorite channels and increase their time spent on Weibo. Another one of Weibo’s main and differentiated functions is a channel for users to discover and discuss popular topics and trends. This key function is now enhanced by placing the discovery zone, where users can find the popular discussion topics, at the main entrance of the new APP versus at a more hidden location in the app previously. To further enhance Weibo’s strong positioning as a channel to follow key opinion leaders and search for quality content, Weibo will provide 2 billion in the next two years to further develop content IP, multichannel networks, Internet celebrities, artists and talent management.