EUR 850.00 For Business Accounts Only

Morningstar | Weibo's Growth Trajectory Helped by Network Effect and Emphasis on Execution; Fairly Valued

Narrow-moat Weibo’s fourth-quarter revenue and non-GAAP operating income were in line with our recently revised estimates, and we maintain our $84 fair value estimate. Weibo’s focus on the content ecosystem--for example, assisting celebrities/key opinion leaders in monetization to drive fan base and content, trending search, breaking news, and social relationships--is unchanged and should continue to help the firm differentiate itself from its competitors. Weibo continues to see key accounts' budgets shift from TV to online and social marketing. We think its strategic directions make sense and therefore we believe the growth trend will continue, but at a slower rate of 18% revenue growth in 2019 versus 49% in 2018. Recovery in verticals affected by regulations and the economy recovery driven by the government’s support measures will take time. To improve small and medium enterprise ad revenue, Weibo will expand into untapped verticals and faster-growing verticals such as Taobao merchants by restructuring its agency system in 2019. It will also change customer mix to match the higher mix from lower-tier cities’ users. Both initiatives will take time to take effect. First-quarter revenue guidance is $395 million-$405 million, or a year-over-year rise of 20.5%-23.5% on a constant-currency basis.

The disappearance of China's population dividend is a structural trend, meaning Weibo will have to put a lot more focus on execution. In December 2018, Weibo's monthly active users reached 462 million, up only 3.6% sequentially. Average daily active users reached 200 million, up only 2.6% sequentially. We believe the user base is saturated. Weibo will put more focus on data analytics and algorithms to improve ad conversion to generate higher ad revenue. For example, advertisers can evaluate their sales conversion on Tmall from the fans accumulated through advertising campaigns on Weibo in collaboration with Alibaba through the uni-marketing program.

In the fourth quarter, Weibo’s net revenue was up 28% year over year, a deceleration from 44% in the third quarter. Non-GAAP operating income was up 18% versus 41.7% in the comparable period in 2017 due to the cost of revenue share of the newly consolidated live broadcasting business and higher personnel costs. On a GAAP basis, operating income was up 26% year over year. Net income margin was 38.1% on a non-GAAP basis and 34.6% on a GAAP basis. Advertising and marketing revenue was up 25% year over year in the quarter, led by strong key account ad revenue growth of 62%. SME ad revenue grew 8% and 14% year over year in constant-currency terms. In addition to the macro slowdown and more stringent regulations in certain verticals having a negative impact on ad revenue, the oversupply in the feed ad market has also negatively affected ad pricing and revenue. Ad revenue from Alibaba was down 18% or 13% on a constant-currency basis, as a result of high advertising spending in the fourth quarter of 2017 amid intense competition. Value-added service revenue rose 44% year over year or 51% on a constant-currency basis, mainly attributed to the recently consolidated live broadcasting business and higher membership revenue.

Weibo’s recent initiatives have shown some good results. In the quarter, traffic for trending search and topics grew by double digits and triple digits, respectively, on a year-over-year basis. In December, the number of topics with weekly views over 1 billion was up by triple digits sequentially, and the number of daily posts in topics from top content creators rose by double digits sequentially. The daily professional-generated content from top content creators grew by triple digits year over year.