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Morningstar | Planning to Reduce Narrow-Moat Weibo’s FVE by No More Than Midteens; Shares Will Remain Undervalued

We expect to reduce our forecasts for Weibo’s net revenue growth from 2018 to 2020 as a result of weaker-than-expected 2018 fourth-quarter guidance, weaker advertising demand amid a slowing economy, and strengthening competition and increasing ad load in China’s advertising space. Weibo’s advertising will be impacted by the pause in game approvals, as the gaming industry is one of the largest verticals of Weibo’s SME business. Weak macro conditions have pressured advertising in auto services, weddings, and certain consumer sectors with higher ticket sizes. Slowing growth of Internet users and the rise of other Internet companies such as Bytedance will put pressure on user engagement at Weibo. To remain competitive, Weibo could require a higher than expected sales and marketing ratio in our opinion, despite management’s guidance for flat operating margin in 2019. Given our long-term investment horizon, we expect near-term weakness to be partly mitigated by a recovery in the economy and therefore advertising demand in 2021 and 2022. This would result in no more than midteens reduction to our current fair value estimate of USD 106 per share. We expect Weibo will still be undervalued after our adjustment.

Weibo’s fourth-quarter net revenue growth guidance is 35% to 38% on a constant currency basis. Weibo’s third-quarter net revenue was up 44% year over year, a sharp deceleration from 68% in the second quarter and 76% in the first quarter due to slower advertising and marketing revenue growth of 48%. Non-GAAP operating margin was 40.8%, versus 39.2% in the second quarter, and 41.2% in the third quarter last year. Weibo’s operating margin was 35.2% in the quarter versus 37.0% in the year-ago period due to an impairment of goodwill and acquired intangibles of USD 10.6 million and higher sales and marketing expense ratio. Weibo’s monthly active user grew 19% year over year and 3.5% sequentially, similar to the growth in the second quarter and exceeded our expectations.