Disclosure: I am long SINA.
May 1, 2012- Snapchat receives $485k in seed funding
December 1, 2012- Snapchat receives $12.5 million Series A funding at $70 million valuation
June 23, 2013- Snapchat raises $60 million in Series B funding plus a $20 million secondary at $880 million valuation
Welcome to the mobile Internet bubble! In less than a year, this seemingly ridiculous app which by its micro 10-second photo nature is designed to naturally inflate its metrics is being valued at just under a billion dollars. Forget that Facebook (FB) already bought a photo app, that that app is still not being monetized, that this application is a potential child porn liability nightmare, that it adds little marginal utility to the mobile universe, and that the founders have a legal mess that makes the Winkelvoss/Zuckerberg saga look like a simple misunderstanding. Just forget all that, and explain to me how this app can ever be monetized if you are not charging for it. It's effectively a gamified photo app which means the company should have thought about charging 99c for it. Personally I think this is the next OMG POP, but who knows maybe Yahoo (YHOO) will bite. Makes you think if Aubrey McClendon was in the app world, he'd be saying why worry about profitability when you can just flip the real estate for 50x.
Anyway, I opened with Snapchat today because for the first time since 1999 we can legitimately say we are in the midst of a full-fledged tech mania. There have been pockets of euphoria over the last few years in areas like social, games, group buying, and China web. But never did these small pockets spread into a full-fledged tech bubble. Well, we are now there. Big data, SAAS, 3D printing, electric cars, Cloud, Mobile, Online discounting, user generated content, and the share economy. If you can attach yourself to one of these themes, the sky is the limit for your share price. And while this is without a doubt a disaster in the making, that is not what I want to write about today. (Shorting tech stocks right now requires the patience of a Buddhist monk because even when you are right you are wrong) Because since Facebook set off this explosion with their mobile ad revenue numbers a month and a half ago, there has been no easier way to make money in markets than riding this trend. And one stock that I have followed closely for the last two years is sitting smack dab in the middle of all of this.
As I mentioned them already after Facebook's explosion, Sina (SINA) looks like the biggest potential beneficiary of a multitude of themes that the market is in love with right now. And as it has been a dog for the past year, it still looks ridiculously cheap when compared to everything else in this lofty space.
Let me start by hitting you with some mobile related factoids on China…
- In February, China passed the US in daily smartphone activations
- According to IDC, China Q1 Smartphone Shipments increased 117%
Now let's shift a bit and look at some Weibo platform data points…
Coca-Cola (KO) ran a customized bottle campaign on Weibo recently that allowed Chinese consumers to nickname a bottle of Coke (Sometimes I wonder if there is some sick evil ad genius out there just salivating over the impressionability of the Chinese consumer). It had celebrities on Weibo customize a few bottles, and then opened it up to the general public to order the same. The delivery fees were paid through Weibo Wallet. Here are the results.
Day 1: 300 bottles sold in 1 hr
Day 2: 500 bottles sold in 30min
Day 3: 500 bottles sold in 5min
Day 4: 300 bottles sold in 1min
BMW just ran a creative campaign on Weibo to promote the Z4. The company called it control z day, and asked users to publish their regrets/things they'd change if they could just hit control z under the #control z tag. On control z day, July 12, 300,000 Weibo users published their regrets.
And now for the really interesting stuff…
After banning sellers on Tmal and Taobao from using Wechat to send promotional messages, Alibaba and Sina have started testing Weibo merchant integration. Three merchants that sell directly on Taobao are now selling through posts directly on Weibo. The posts provide the price, merchant logo, Taobao rating, product popularity, and the ability to share this with others by clicking a button.
According to public info, one of the three test merchants advertised the sale of a fried green bean product. In a couple of seconds they had three orders. On that day Weibo traffic accounted for 50% of all the retailers' traffic, and surpassed the total traffic of the four preceding days. Yes this is a small data point, but there is no denying the potential ramifications.
What you have here is a mobile first country in which engagement is higher and unlike anything we have witnessed in the west. Furthermore, through this Alibaba/Sina partnership, you now have what could be a virtual monopoly in this space. Think of eBay (EBAY)/Amazon (AMZN) being tightly integrated with Twitter/Facebook.
Now the question you need to ask yourself is why has this stock remained such a laggard for so long.
The way I see it there were a few things going on over the past year that worked against Sina.
First and foremost the markets in general freaked out about mobile monetization, and stocks with heavy exposure to this transition underperformed, most notably Facebook and Baidu (BIDU). Sina was no exception to this rule. Weibo engagement is all about mobile, and the transition towards mobile has weighed on operating results. As traditional online advertising has shifted away from PC, the Sina portal biz growth has slowed. At the same time, Weibo monetization has been slow, as management has continued to focus on user engagement. Add in the declining mobile value added services revenue thanks to regulatory changes and Wechat competition, and you pretty much had more than enough factors to weigh on the stock. Problem is Weibo has always been as good as advertised, and you'd like to think at the valuation it was carrying that investors would be willing to give them the benefit of the doubt. I mean at one point this past year the stock hit $2.6 billion. Back out the cash and investments and you were looking at a $1.5 billion biz. You know what trades at that valuation right now? Angie's List (ANGI)! Yes, a company that is such a joke and I assure you will one day in the not so distant future trade at 1/10 of its current value was worth as much as what is effectively the Twitter/Facebook of Asia.
Now you are going to witness just how quickly the market's mood can change.
It has been no secret that the momo 'we believe' types have gone nowhere near Sina for a long time. I would now argue this is going to become one of their favorite names.
With smartphones seemingly hitting critical mass in the last two quarters in mainland China, the fears about mobile pricing being replaced by the euphoria of mobile impression volumes, and the Alibaba partnership isolating Tencent's Wechat; Weibo now looks like the most promotable Web asset in all of Asia. It is sitting at the intersection of the digital growth trifecta: China mobile/social/ecommerce.
And the most interesting part of all of this is despite the recent slow and steady rally, it's still not priced like other stocks in the space with much less marketable stories.
What is Sina Worth?
At its current $5 billion valuation, Sina trades at 4.3x book and 8x EV/sales. Putting that in perspective Qihoo (QIHU) is at 21x sales and 17x book, and Baidu is at 9.5x book and 11x sales. The hot web properties in the US (YELP, LNKD, FB, Z, etc.) benefiting from similar trends are in the 20x EV/sales range, and all are much further along in the monetization game. Now, I'd argue mobile in China is going to be more lucrative for the players who dominate it because the engagement is clearly higher. I'd also argue that Weibo being more of a Facebook/Twitter hybrid in China is socially the best positioned from an ad revenue standpoint and is set to milk the mobile advertising high volume impression story. I'd then add in from an ecommerce standpoint, as far as potential for generating platform transaction fee revenue, Weibo pretty much is sitting in a monopoly position thanks to the Alibaba deal.
So early stage Weibo should get a much higher EV/sales multiple than everyone else. Let's call that multiple 40x for now as the Alibaba deal has been structured in such a way to basically at minimum provide a revenue base that is double what it generated in 2012. Clearly they are looking for some IPO critical mass here, as they think they can generate a significant return from floating Weibo. With employees/management owning 11% of Weibo, and Alibaba presently at 18% but definitely heading to 30% before floating; I see no other exit. I also think they are probably aiming for something in the $10 billion range when it lists, a valuation Sina saw even before all this mobile/social madness got going. Anyway 40x on a trailing basis gets you $4 billion at Weibo's current $100 million annual run rate. This, however, excludes Alibaba related minimum committed revenue that will be about $120 million a year. Slap the new market bubble standard of 20x multiple on that and you get another $2.4 billion. That get's you to $6.4 billion, which by the way I am going to guess is plus or minus a billion from where Alibaba has agreed to acquire the remaining 12% of its planned 30% stake. Anyway, 71% of $6.4 billion equates to $4.5 billion or $500 million less than Sina's current total market cap. Now add in a $1 billion in cash/short-term investments, $500 million in equity investments, and a deeply discounted 1.5x multiple on the portal revenue of let's say $500 million. That's another $2.25 billion. That leaves you with 35% upside. But frankly speaking I think this is going to be conservative. With Alibaba looking like a $100 billion stock now, Tencent at $85 billion, Baidu at $50 billion, and Qihoo pushing $10 billion; Sina Weibo's value is probably significantly higher. In my humble opinion, somewhere above Qihoo but below Baidu. But for argument's sake let's call it $10 billion. Assuming Alibaba's option works out to something closer to a $5 billion valuation, Sina will see $500 million more in cash pre-Weibo IPO. Sina shareholders will end up holding 60% of $10 billion company. That adds another $2 billion in value, and translates into 75% upside in the stock.
Yes, all very subjective stuff but at least in Sina's case you are not buying into a flipper story. It is the most well-positioned property in China and greater Asia as far as social/mobile platforms go. And if you like the data on China mobile engagement, factor in the surge in smartphone sales thanks to plummeting prices, and look at what Facebook accomplished in mobile ads over such a short period; you can be wildly optimistic about where the sentiment on this name is heading.
Normally I am very wary of such late to the party/ follow the trend potential investments, because they typically are very reactive and come with the fear of being the last one in the door. They also often look like traps. But if you consider that up until a month and half ago the shift to mobile was viewed as a problem for everyone in the social space, it is still too early to be worried about being late. Now add in that Weibo mobile platform user base monetization has been one of the biggest drags on Sina's share price, and you have to like the potential for a catalyst to turn this into a new market darling. Mix in the anecdotal stories from above which are perfect real world examples of what the market has started to reprice into the likes of Yelp, Facebook, and Baidu. Then top it off with the news of Alibaba suspending mobile mind share competitor Wechat's access to their marketplace.
Oh, and if that is not enough, sprinkle in some Alibaba and Twitter IPO speculation.
All this makes Sina tough to ignore. Now the stock had a massive run up into earnings, and has drifted sideways since. And to be honest I wrote the bulk of this piece over a month ago in the post Facebook web frenzy expecting some more momentum. So far it has not materialized, but after reading a bearish post on SA, which completely missed the mark, I felt I had to share this. This stock was a pain in my *** last year, and it's becoming patently obvious that few people investing really get the story. The good news is that's how you make killer returns. The bad news is it requires a lot of patience. In my humble opinion, this is the ONLY web related property worth blindly buying right now. Either it doubles or triples over the next few years or everyone else in the space gets seriously repriced. My biggest concern is that Alibaba lowballs its way into an outright takeover and steals the name before the market wakes up.
By Akrams Razor
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