A couple of weeks ago, Sina, an online Chinese media company, reported earnings for the December quarter that were well ahead of Wall Street estimates (at the time) and also raised guidance going forward.
However, since its earnings, shares of Sina are down from $78.99 per share (closing price the day of earnings on Feb 22) to $69.23 per share this past Friday. I had a long position going into Sina earnings on February 22 but decided to cash in for a return of 2.5x the investment ahead of the report that night.
All that aside, what's with the 13% haircut in the stock given the company beat and raised guidance going forward?
There are several factors currently at play, with Sina in particular and with Chinese stocks in general, that are creating a pretty big undervaluation in the space at present.
Looming very large is the trade and tariff issue that President Trump has raised with our trading partners, including China. At present, Chinese exports to the U.S. dwarf U.S, exports to China (roughly $165 billion in 2016) by a factor of 4. President Trump wants to narrow that trade imbalance if not balance it. The fear among investors and thus the present disdain for Chinese investments is that there will be an all-out trade war with China. Being a businessman, I doubt the POTUS will get into a trade war with China or with any other trading partner for that matter. More than likely, the U.S. and China will find common ground on the trade issue and the current overhang will likely fade away, creating immense value in the Chinese companies that trade on our exchanges once the overhang is behind us.
Sina owns roughly 55% in Weibo (often called the Facebook and Twitter of China) which is currently valued at $10.85 billion, after dropping from $58.21 per share (Feb 22-day of its own earnings report as well) down to $50.30 this past Friday. Incidentally, Alibaba owns about 20% in Weibo as well.
Even at currently depressed levels, Sina's 55% stake in Weibo is worth $6 billion. Sina itself is currently valued at $4.9 billion.
Post earnings, Wall Street analysts have raised estimates for Weibo to $1.35 per share on revenues of $978 million for 2017 and to $1.90 per share on revenues of $1.3 billion for 2018. At $50.30, Weibo is currently trading at 57x estimated 2017 earnings and at 26.5x its estimated 2018 earnings. Comparatively, Twitter trades at 53x estimated Street earnings for 2017 and at 38.4x estimated earnings for 2018. Revenue growth rates (2018 over 2017) for Twitter are expected to be 7% versus 35% topline growth anticipated by Wall Street analysts for Weibo for the same period.
In a mind-boggling comparison, recently minted IPO-Snap Inc closed at $27.09 per share and is worth $31.4 billion at this price level. Weibo has slightly more monthly average users than Snap has (313 million versus 301 million) but is still valued at a third of Snap's valuation. (Think about that one)
Similarly, the Street now expects Sina to report higher earnings of $2.41 per share on revenues of $1.37 billion for 2017 and $3.54 per share on revenues of $1.7 billion for 2018. At $69.23 per share, Sina trades at 28.7x estimated earnings for 2017 and at 19.6x estimated 2018 earnings.
Sina also has approximately $23 per share in cash and cash equivalents on hand.
Cut the value of Sina's stake in Weibo by half, cut the current stock price of Sina by half and add the cash back in and Sina is still worth $7.1 billion which is an undervaluation of 40% from drastically reduced valuation multiples. That would imply a share price of $96-$97 per share.
Heck, just give Weibo a monthly average user multiple that Snap just received and trash everything else about Sina including its own core earnings and operations and its cash holdings, and Sina shares are worth at least 3x based on its 55% stake in Weibo on its own.
However, investors at the moment are so caught up in the negative China rhetoric that seeing the forest for the trees is almost impossible.
Therein lies the opportunity.
Buy on the sound of cannons and sell on the sound of trumpets comes to mind, no?
(long baba, baba calls, no positions at the moment in snap, sina, wb, twtr, fb)
