Weibo's Shares Still Have Legs To Run

Elevator Pitch

Weibo Corporation's (NASDAQ:WB) [9898:HK] shares are rated as a Buy.

With my earlier update for Weibo written on November 18, 2022, I reviewed WB's financial results for the third quarter of the previous year and previewed the company's Q4 2022 earnings. I also upgraded Weibo's investment rating from a Hold to a Buy in consideration of WB's potential for valuation re-rating. In the two months or so following my prior article, WB's shares have gone up by +42% from $15.50 (Weibo's stock price at point of publication) to $21.95 at the end of the January 25, 2023 trading day. I am of the view that there is room for Weibo's stock price to go up further.

In this latest update for WB, I analyze Weibo's growth prospects and profitability outlook for 2023. WB should deliver positive revenue growth and higher profit margins in 2023, which should drive a P/E multiple expansion for its shares. Therefore, I have decided to stick to my Buy rating for WB.

Positive Revenue Growth Will Be Led By Strong Advertising Demand For Specific Industries

Based on S&P Capital IQ's aggregation of financial estimates from 23 analysts covering WB's stock, Weibo is expected to turn around from a -18% top line contraction in fiscal 2022 to achieve a +3% revenue expansion this year.

At its most recent Q3 2022 results briefing in mid-November last year, WB shared that there were some industries in China which exhibited signs of advertising demand recovery. Specifically, Weibo noted at the company's third quarter investor call that advertising "budgets from e-commerce platforms returned to a growth trajectory" for this year's "Double 11 shopping festival" in November. WB also mentioned that it "gained certain ad budgets" for "the online gaming sector."

In my opinion, the advertising demand for the Chinese online gaming and e-commerce markets should be reasonably strong for the current year, which will translate into an increase in advertising and marketing revenue for WB in 2023.

A January 17, 2023 Seeking Alpha News article indicated that "88 new online games" were recently given the go-ahead to be published by Chinese regulators. A Reuters article published on January 20, 2023 cited Citigroup's (C) projections that the number of online game approvals could rise sharply from 755 in the prior year to as many as 900 for the current year. This suggests that regulatory headwinds for China's online gaming sector have eased considerably. It is noteworthy that there weren't any new games approved by China for the July 2021-April 2022 period. With more new games approved and released in China this year, it is very likely that Weibo will generate higher advertising and market revenue from the online gaming industry this year.

Separately, weak consumer sentiment and supply chain disruptions were a drag on e-commerce sales in China last year. But it is highly probable that China will witness strong e-commerce sales growth in 2023 as the country reopens. It is noteworthy that Chinese internet giant Alibaba (BABA) disclosed that product sales relating to the Lunar New Year festival on its e-commerce platforms rose by roughly +30% YoY for the first half of January 2023. As such, it is reasonable to expect Chinese e-commerce companies like BABA to spend more on advertising in 2023, which will be a key top line growth driver for WB.

Weibo's Status As Key Chinese Social Media Platform Operator Remains Intact

Weibo is likely to have maintained or even expanded its share of China's social media market in recent times, according to the company's user statistics revealed in its quarterly earnings announcements.

As of the end of September 2022, WB's daily active users increased by +5 million YoY and +1 million MoM (Month on Month) to 253 million. The monthly active users for Weibo also rose by +2 million MoM and +11 million YoY to 584 million in September last year. Weibo's users aren't just becoming more engaged; WB's users are also spending more on the company's social media platform. The company mentioned at its Q3 2022 earnings briefing that the average amount of money a user spends on paid content on WB's platform grew by +40% QoQ in Q3 2022.

With WB retaining its status as one of the leading social media platform operators in the country, Weibo is well-positioned to benefit from the Chinese advertising market's recovery in 2023.

Good Expense Management Will Be Supportive Of Margin Expansion And Earnings Growth

Earlier in this article, I made reference to the sell-side's consensus FY 2023 top line growth forecast of +3% for Weibo. In fact, the market's consensus financial figures (source: S&P Capital IQ) point to WB's normalized net profit growing at an even faster rate of +10% in 2023.

Apart from operating leverage, good expense management is also a key factor that supports WB's bottom line growth in the current year.

Analysts project that Weibo's normalized net income margin will increase from 26.3% in FY 2022 to 28.0% for FY 2023. This is aligned with Weibo's management comments at its Q3 2022 results call regarding its plans to manage "marketing and also labor" expenses going forward, so as to "further reduce the costs" for 1H 2023.

Closing Thoughts

My rating for Weibo's stock stays as a Buy. WB trades at 9.9 times consensus forward next twelve months' normalized P/E now as per S&P Capital IQ's valuation data. I think Weibo should be valued at a higher P/E multiple closer to its five-year mean P/E ratio of 17.9 times, as its revenue and earnings recover.

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