Breaking Down The Impact Of R&D Expenses On Sina’s Revenue Growth

Sina Corp (NASDAQ:SINA) has had a positive year, with its stock price rising from around $60 at the beginning of the year to over $100 currently. The company has reported successive quarters of strong revenue growth complemented by a healthier balance sheet since the beginning of the year. Although the company announced that it will reduce its stake in social media website Weibo in July, it is still on course to end the year on a positive note.

In addition to strong revenue growth in recent years, Sina has also managed its operating expenses to enhance the impact of growing revenues on net cash profits. While its research and development costs remain substantial, it has worked to improve its efficiency as measured by the revenue generated per dollar spent on R&D expenses. Below we take a look at the company’s R&D spend and its impact on the company’s financials.

Measuring R&D Efficiency For Sina

Sina’s net revenues grew at a CAGR of over 18% from $529 million in 2012 to over $1 billion in 2016. Growth largely came from Sina’s advertising segment, particularly through Weibo. In the same period, Sina’s gross profit increased at over 25% annually, as shown below. As a result, its gross profit margin improved from 53% in 2012 to 68% in 2016.

Sina generated roughly $5.10 per dollar spent on R&D expenses in 2012, and the figure fell to around $4.20 by 2014. Subsequently, the figure improved to over $4.50 and $5.30 per R&D dollar spent in 2015 and 2016, as shown below. Similarly, the company’s adjusted gross profit per dollar of SG&A expenses stood at $2.70 from 2012 through 2014, and increased to around $3.50 by 2016. While revenues (and subsequent gross profits) increased in this period, Sina’s R&D expenses stabilized around $185-195 million in recent years. It should be noted that the R&D expenses used in Trefis models are adjusted for non-cash expenses such as share-based compensation.

Forecast For R&D

In terms of operating efficiency, Sina expects its cash operating expenses to continue to increase in the coming years due to its efforts to expand product portfolios and enhance platforms. Furthermore, with a lower stake in Weibo, it is imperative for Sina to enhance and improve its core portal business and draw more advertisers to its platforms. As a result, we forecast Sina’s R&D expenses to increase at high single digits through the end of our forecast period.

We forecast Sina’s net revenues to continue to grow strongly, albeit slower than historic rates due to a large base factor. According to our estimates, net revenues are expected to increase at over 10% to reach $2 billion by the end of the decade. Growth is largely expected from Sina’s advertising business.

We forecast gross margins to remain around current levels, improving gradually through our forecast period. 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. As a result, despite R&D expenses increasing in absolute terms, we forecast the company’s revenue and gross profit generated per dollar spent on R&D to stabilize at around $5.50 and $3.80, respectively.

2017 Forecast

We forecast Sina’s display advertising revenues to continue to benefit from Weibo, despite the slight reduction in stake. We forecast ad revenues to increase by around 40% and net revenues to be up 35% to over $1.4 billion. We expect the healthy revenue growth and improvement in gross margins to translate to healthier operating profit margins. It is interesting to note that net cash (around $2.9 billion) remains a significant contributor to the company’s value.

You can modify the interactive charts in this note to observe the impact a change in Sina’s Gross Margin, and R&D expenses as a percentage of gross profit, can have on our price estimate for the company’s stock. Based on our forecasts, we have a $78 price estimate for Sina’s stock, which around 25% lower than the current market price.

See our complete analysis for Sina

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