INTERNET – Weibo Blinks As NetEase Shutters Microblog
Bottom line: NetEase’s withdrawal from microblogging represents a broader decline for the overall sector, and is likely to put downward pressure on Weibo shares over the medium to longer term.
Media reports that web stalwart NetEase (Nasdaq: NTES) will finally shutter its microblogging service don’t come as a big surprise, since it’s been years since anyone has posed a challenge to the dominance of sector leader Weibo (Nasdaq: WB). But what does come as a slight surprise was the reaction to the news in Weibo’s share price. One would normally expect Weibo shares to rally on news of a competitor’s demise, but instead Weibo’s shares actually fell nearly 4 percent in the latest trading session.
Weibo shares could come under more pressure in the weeks ahead, as investors rapidly wake up to the reality that the company’s own future could come into question as it faces its own rising threat from Tencent’s (HKEx: 700) WeChat mobile messaging service. The picture is only likely to get tougher in the years ahead, as a growing number of foreign social networking services (SNS) like US titan Facebook (Nasdaq: FB), Japan’s Line and even the original Twitter (NYSE: TWTR) eye the China market.
Against that backdrop, it’s not difficult to see why NetEase finally decided to pull the plug on its foundering microblogging service, which it launched around the same time that Sina (Nasdaq: SINA) started Weibo about 5 years ago. According to the reports, NetEase will officially close the site soon, and all users will be migrated to another service called Lofter (Chinese article) I checked my own NetEase microblog account, which I seldom use anymore, and there’s a message confirming the changes.
From NetEase’s perspective, this was probably an easy decision to make. The company last year launched a new mobile-based instant messaging service in partnership with China Telecom (HKEx: 728), and has clearly decided to place its SNS bets on that product, called Yichat. (previous post) Reports earlier this year also indicated that Tencent was getting ready to scrap its own microblogging service. But in the end Tencent denied the reports and said it would combine the product with its news division, in a broader reorganization of its online media group. (previous post)
One could interpret all of this movement in two ways. The first would be to say this exit by NetEase and retrenchment by Tencent are victories for Weibo, which was already the clear leader in the space. The other is less upbeat, and would argue that Weibo itself is failing to innovate and keep pace with the move to mobile and more flexible messaging services.
I would say the second case is more likely, and many investors probably agree with that view. Weibo’s shares have had a rocky ride since their IPO in April, and are now up 11 percent from their offering price. That’s far less than most other Chinese Internet companies that have made offerings over that period.
Weibo’s 2 financial reports since the offering both look solid enough, though the overall trends aren’t too encouraging. The company’s revenue grew by triple-digit percentages in both the first and second quarters of this year, though the growth rate slowed sharply to 105 percent in the second quarter from 161 percent in the first. Growth rate in its users also slowed over that period to about 31 percent from 35 percent, and the company still remains firmly in the loss column.
Weibo will report its third-quarter results next week, and I fully expect its revenue growth to slip into double-digits, and its user growth to fall into the 20 percent range. Many people believe the company’s real user numbers are already contracting, and I really don’t hear much positive buzz about the service from my many friends anymore these days. Accordingly, I don’t see much upside for the company or its stock over the longer term, and a disappointing quarterly report next week could easily spark a sell-off that pushes shares below their IPO price.
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