Sina Price Estimate Revised To $41, Here’s Why

We recently revised our price estimate for Sina (NASDAQ:SINA) to about $41, which is slightly ahead of the current market price. Our new model reflects the company’s reliance on advertising revenues, as well as the fact that the largest component of the company’s value comes from its cash and short-term investments. Additionally, in light of the heightened risk related to Chinese Internet firms, and the economic uncertainty in its markets, we revised our cost of capital upwards. This has led to a considerable reduction in our price estimate.

See our complete analysis of Sina here

Revenue Concentration Around Core Areas

Two key pillars of Sina’s revenue are portal advertising and micro-blogging. The portal advertising business has been under pressure of late, and saw a year-on-year decline of 6% in Q3 2014. The company’s revenue growth is being largely driven by its micro-blogging platform Weibo. Weibo revenues grew about 58% year-on-year in Q3 2014. Portal advertising and Weibo currently account for 51% and 43% of Sina’s revenues. respectively. The current growth, led by Weibo, may not be sustainable due to three primary challenges. Firstly, Weibo’s shift to mobile has not led to significant growth in users, and many have actually migrated to rival WeChat. Consequently, Tencent-owned WeChat registered a 57% year-on-year increase in users in Q2 2014. Secondly, Weibo appears to be relatively mature at this point, with a reduction in the rate of addition of new users over the past few quarters (though some of this was related to the aforementioned competition). Additionally, Weibo’s monetization has been a challenge. Monetization will require increased advertising, which could compromise the mobile experience. ((Long-Term Challenges Loom For Weibo)) On account of these challenges, we have forecast Sina’s market share in the Chinese online advertising to decline and stabilize at around 2.5%.

Chinese Uncertainty

Sina is also vulnerable to risks related to the slowdown in the Chinese economic growth. China missed its growth forecast of 7.5% in 2014, and the IMF has reduced its 2015 GDP growth estimates for China from 7.1% to 6.8%. ^[1] To reflect this increase, we have raised our discount rate for Sina’s cash flows to 14.5%. ((How Scary Is The Slowdown In China)) Slowing economic growth – particularly in the auto and consumer goods industries – could impact marketing spending in China, which could put the company’s future advertising revenues at risk. This additional country risk led to our increase in the discount rate in our model.

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