Sina Weibo – Fair deal

Sina Weibo is heading for an IPO at a fair price.

• Sina Weibo, the Chinese Twitter look alike, has broken even just in time for it to IPO.
• Weibo saw 61.4 active users in Q4 2013 up from 58.9m in Q3 2013 upon which it was able to earn $197m in Q4 13 revenues.
• The company posted net income of $44.5m which was very comfortably ahead of market expectations of $28.1m.
• While monetisation has been excellent, the concern remains user growth.
• China is a gigantic market, selling hundreds of millions of digital devices per year and with only 61.4m active users the penetration of Weibo remains relatively low.
• By contrast, Twitter will have over 250m active users this year in a comparatively smaller market.
• Hence, when it comes to investor education and the IPO roadshow, I suspect that user growth will be the number one issue on investors’ minds.
• This will be particularly the case as user growth was the number one issue when Twitter reported its maiden results a few weeks ago.
• Despite the wobble, Twitter’s valuation remains far above fair value (30x 2014 EV/sales) which is something that Weibo will be able to capitalise on.
• The current run rate of revenues is $800m per year making 10x EV/sales comfortably achievable when compared to Twitter even taking into account an emerging market discount.
• Even if Twitter were to fall to my fair value for $32 per share from $54.8, it would still be on 16.7x 2014E sales which is meaningfully above the top of the range for Weibo.
• Hence, I suspect that this will prove to be a popular IPO as Weibo is in the sweet spot of the most exciting area of the technology sector at the moment.
• And for once, the valuation does not look outrageous.