Weibo Files For $500 Million U.S. IPO

Sina’s (NASDAQ:SINA) Twitter-like microblog Weibo Corp., which enables users to follow celebrities and share user-generated content, filed for a $500 million IPO this month. Weibo intends to use about half of the proceeds to repay loans to its parent Sina, and the remaining half to develop technology, infrastructure and products, to expand sales and marketing efforts, and to manage working capital needs. ^[1] The IPO comes after Alibaba’s purchase of 18% stake in Weibo last year for $586 million. Interestingly, the deal valued Weibo alone at $3.3 billion, which was the entire market capitalization for Sina at that time even though Weibo generated less than one-fourth of the company’s revenues.

Key Risks The Listing Document Cautions Investors About

China has long put restrictions on dissemination of socially agitating content. Weibo’s listing document contains a 56-page section on risks associated with the business and how laws and rules in China could affect the company. Failure to comply with such regulations may result in temporary/permanent shutdown of operations or revocation of Weibo’s license. For instance, in March 2012, the company had to disable the ‘comment’ feature for three days and clean feeds related to certain rumors. ^[1] Twitter enjoys much more freedom compared to Weibo since it is present outside of China.

We feel that unfavorable government regulations might restrict Weibo’s growth in the Chinese online advertising market. The Chinese government has stringent regulations for online businesses, and major networking sites such as Facebook and Twitter are banned in the country. If the government introduces some adverse policy changes, it could hinder Weibo’s future growth.

IPO Will Help Counter Competition

While Weibo’s user base has expanded to 129 million monthly active users in December 2013 from 96 million in the year-ago period, it has also faced increased competition from Tencent to acquire these users. Tencent competes with Sina using its own Weibo service and WeChat ─ a mobile message application with over 300 million registered users. The growing popularity of these services has had an impact on the number of users and the average time spent by users on Weibo. We believe that the IPO will provide Weibo with additional resources to address this growing threat.

Weibo Should Become Profitable This Year

Launched in August 2009, Weibo started generating revenues in the back half of 2012. The sale of advertisements and marketing services is the primary source of revenue for the company. Weibo earned about $66 million in 2012, which grew nearly three-fold to $188 million in 2013. ^[1]

A large chunk (25%) of the revenues in 2013 came from Weibo’s recent deal with Alibaba. The collaboration between the two companies is being strengthened, with tighter integration between Weibo users and Taobao merchants, and the use of Alipay to enhance mobile monetization.  As the two companies continue to collaborate in areas such as account connectivity, data exchange, online payment and online marketing, we expect Weibo’s monetization to pick up rapidly in the future. We also expect the platform to benefit as social media gains more acceptance for online advertising.

While Weibo’s top line grew robustly over 2012–2013, its net loss contracted from $102.5 million to $38 million during the same period due to the growing scale of its advertising business. We expect the company to turn profitable this year, as it is seeking to further strengthen its monetization capabilities in mobile, online gaming, e-commerce and other value-added services.

Our price estimate of $83 for Sina implies a premium of about 30% to the market price for the stock.

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1. Form F-1 Registration Statement, www.sec.gov, March 2014 [↩] [↩] [↩]