Sina’s Stock Remains Volatile, Price Estimate Revised To $75

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SINA: Sina logo
SINA
Sina

Sina Corp (NASDAQ:SINA) has had an interesting year, with its stock price rising from around $50 in July of last year to a year-high of $105 in May this year, primarily due successive quarters of strong revenue growth complemented by a healthier balance sheet. Subsequently, its share price dropped to below $90 a share last month after the company announced that it will reduce its stake in social media website Weibo.

Below we explore reasons why Sina’s stock price has fluctuated so much in the last year, and the factors that justify our $75 price estimate for the company. Our price estimate is nearly 20% below the current market price. 

See our complete analysis for Sina.

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Sina generates a significant portion of its revenues from online brand advertising and marketing on its Sina website and on Weibo. With smartphone and internet penetration increasing in China, advertising revenues (particularly on Weibo) have grown strongly. Comparatively, the company’s Mobile Value Added Services segment revenues generated by SMS, IVR (Interactive Voice Response) and other such services have fallen considerably.

  • Strong Growth In Ad Revenues, Healthy Margins

 Sina reported a strong end to 2016, with 17% annual growth in revenues complemented by a 3 percentage point improvement in gross margins. Net revenues were up with a significant contribution from advertising revenues from both Weibo as well as Sina’s portal business. Within the advertising segments, the contribution from small and medium enterprise (SME) customers was crucial to growth. (Read more: How Crucial Are Small & Mid-Sized Businesses For Sina’s Advertising Business?)

Moreover, advertising is a high-margin segment compared to Sina’s other revenue streams, as shown below. Over the last couple of years, strong growth in Sina’s ad business has led to ad revenues forming a higher proportion of net revenues, thereby driving gross margins upwards. We expect this trend to continue through 2017 as well, with ad segment contributing meaningfully towards improving gross margins.

Additionally, the company has successfully improved operating efficiency, and its largely fixed operational costs led the company’s cash operating expenses to stay flat over previous year levels. As a result, Sina’s adjusted EBITDA margin has consistently improved from low single digits in recent years to over 14% in 2015. We expect future revenue growth and improvement in gross margins for Sina’s advertising segment to help sustain growth in operating profits in the coming years.

  • Reduced Stake In Weibo

Weibo’s social media platform has similarities to both Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB). Weibo has over 600 million registered users, of which almost 140 million are monthly active users. As a result, Weibo has become very popular among brand advertisers in China in recent years. The social media platform gives major brand retailers a huge opportunity to cater to the fast-growing user base. Within Sina’s advertising segment, Weibo has been the key growth driver over the years. Weibo’s advertising revenues have surged from $148 million in 2013 to $567 million in 2016 – a compound annual growth rate of over 55%.

Last month Sina’s management announced that the company will reduce its stake in Weibo from 49% to 46% effective from this month.  However, Sina’s voting rights will remain at around 72% despite the slight reduction in stake. A key reason for this stake reduction is that Sina’s portal ad business is a slowing business, which could potentially weigh on Weibo’s growth. Weibo’s shareholders reacted positively to this news, with its stock price jumping from $55 to over $70 a share in the last two months. Comparatively, Sina’s stock price fell from $105 to around $90 in the same period.

  • Net Cash Significant to Company’s Value

It is interesting to note that net cash (around $2.9 billion) remains a significant contributor to the company’s value. At the end of the December quarter last year, Sina’s management reported that the company used its cash and short-term investments to repay its debt in 2016. Sina used short-term investments to repay roughly $650 million of its convertible debt in the fourth quarter, which was partially offset by the cash inflow and proceeds from disposal of certain investments.

As a result, the company’s net debt fell from around $1.1 billion at the end of Q2 2016 to under $600 million at the end of Q1 2017. Moreover, its net cash increased slightly from $3.4 billion at the end of Q2’16 to $3.5 billion at the end of March quarter this year. This was a key factor that drove Sina’s share price upwards late last year and early this year, as that cash balance contributes a significant portion of the company’s value.

2017 Forecast

We forecast Sina’s display advertising revenues to continue to benefit from Weibo, despite the slight reduction in stake. Ad revenues could increase by 35% to just under $1.2 billion for the year while net revenues could be up 30% to over $1.3 billion. We forecast the healthy revenue growth and improvement in gross margins to translate to healthier operating profit margins.

Based on our forecasts, our valuation for Sina stands at $5.5 billion or $75 per share. Our price estimate is around 20% lower than the current market price. You can modify the interactive charts in this note to observe the impact a change in these key drivers can have on our price estimate for the company.

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