Morningstar | WB Updated Forecasts and Estimates from 14 Nov 2018
Narrow-moat Weibo posted another strong result for the second quarter, with net revenue growing 68% to USD 426.6 million, slightly exceeding our expectation of USD 414 million. The robust growth rate was driven by 69% growth in advertising and marketing revenue to USD 370 million and 62% growth in value-added services to USD 57 million. Management is guiding third-quarter net revenue at USD 465 million-USD 475 million, or an increase of 49% year over year to 52% year over year, while we’re projecting at the high end of the range at 56%. Non-GAAP net income increased 80% and margin expanded to 36.6%, versus 34% in the year-ago period, helped by a lower proportion of product development, general, and administrative expenses on fast-growth revenue.Despite the solid results, Weibo’s shares fell 4% on the day following the earnings release, as the market remained concerned about its slowing growth in active users as competition intensifies from popular short video, live streaming, and newsfeed apps such as Douyin, Kuaishou, and Toutiao. An ongoing slowdown in mobile Internet user growth and mobile phone shipments, along with Chinese yuan depreciation pressure, also aggregated the market’s worries. With shares trading at a 25% discount to our USD 106 fair value estimate, the stock is undervalued and we believe concerns on intensifying competition are overblown, given that Weibo’s strong network effect underpinned by its social media functionality on the “Twitter-plus-Instagram-plus-YouTube†platform is not easy to duplicate, especially when its monthly active users, or MAU, surpassed 430 million in June, further strengthening the value of its social network.
As expected, MAU growth further decelerated to 19.4% year on year to 431 million in the past quarter, lower than 21% in the first quarter and 25% in 2017. Sequential growth remained flat at 4.9% from the previous quarter, having slightly rebounded from 4.2% in the second half of 2017. Management is still targeting 15%-20% growth in MAU for 2018. The slowdown in MAU is significant when compared with the 30%-plus level during 2013-16, when Weibo started to penetrate third-tier cities from first- and second-tier cities. The strategy went over well, as more than half of new users come from third-tier cities or below and penetration rate in these cities doubled from 2013’s level. Management attributed the slowdown in user growth to its early stage of further penetration into fourth-tier and below cities with greater geographic dispersion and lower user acceptance rates. As a result, Weibo has increased its selling and marketing spending to attract new users and improve user engagement. Its marketing campaigns include TV advertisements and check-in awards for users from lower-tier cities.
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