Sina At Crossroads, Aims To Calm Investors

By newsdoug on May 5, 2014

A series of announcements late last week from leading web portal Sina (Nasdaq: SINA) looks clearly aimed at calming nervous investors who may sense the company is at a crossroads that could mark the start of a new downturn for the stock. That’s my assessment after Sina’s unusual early release of preliminary first-quarter results, which showed the company is still quite healthy financially despite a recent government crackdown on 2 of its sites and a lukewarm stock market debut for its Weibo (Nasdaq: WB) microblogging platform.

The signs definitely look mixed for Sina, and these 2 latest announcements show that risks from a business slowdown or government crackdown on pornography are probably relatively small. But momentum investors may not care too much about actual facts, putting more pressure on Sina’s shares that have already given back all of the meteoric gains they posted in the second half of 2013.

Before we zoom in on the latest news, it’s helpful to look at stock trends for Sina and Weibo over the last year. After stagnating for several years, Sina shares embarked on a rally that saw them rise more than 60 percent in the second half of 2013, as investors more broadly embraced Chinese Internet stocks after a 2 year pause. But the shares have given back all those gains since the start of the year, and now actually trade lower than their pre-rally levels.

A new sell-off occurred early last week when the company revealed that 2 of its licenses, one for online publishing and another for online audio-video, were revoked due to the presence of pornographic material on 2 of its sites. I previously said the move by the regulator looked largely symbolic, since neither business was important to Sina (previous post). Now Sina has added that the regulator has imposed a large but quite affordable fine of $815,000 for the violations. (company announcement)

Sina shares fell as much as 14 percent from previous levels in the days after the regulatory announcement, but have somewhat stabilized since then. Meantime, Weibo, which is majority owned by Sina and is one of its most valuable assets, isn’t doing much to support Sina stock since its own IPO more than 2 weeks ago. Weibo had to cut the size of its offering nearly in half due to weak demand, and the stock has been volatile since then and is now up 18 percent from its offer price.

Against that backdrop, this rare pre-release of Sina’s first-quarter results looks like an attempt to reassure markets that the company is in a strong financial position and that its trends look positive. The company said it will report a $33 million net loss for the quarter, due to a $40 million one-time item related to the value of Weibo options. (company announcement) Without that item the company would have reported a non-GAPP $11 million first-quarter profit, up sharply from $1.5 million a year earlier. Revenue also rose a healthy 35 percent to $171 million from $126 million a year earlier, as Weibo’s contribution continued to grow.

So, what’s the bottom line in all this flow of news and information? Sina clearly wants to send the message that it’s a healthy company with good growth prospects, and that Weibo will be an important part of that growth story. Frankly speaking, I believe that story and do think Sina looks like a strong investment over the long term as one of China’s top independent providers of news and information. But momentum investors may think differently, and could seize on the regulator’s move as an excuse to dump shares over the next few weeks. That means we could see some big volatility in the company stock in May and June, even if the longer-term trends should be more positive.

Bottom line: Sina’s quarterly results show it is growing strongly despite a new government crackdown on some non-core units, but the stock could be volatile for the next 2 months due to momentum selling.