Sina Weibo Zooms, IPO In Store?
After a wait of more than 2 years, Sina’s (Nasdaq: SINA) hugely popular Weibo microblogging platform is finally realizing some of its potential, raising the possibility we could finally see an IPO for the Twitter-like service in the next year. People started buzzing about a Weibo IPO as early as late 2010, when the service first began its meteoric rise after Beijing blocked the original Twitter in 2009. But then investors quickly cooled to the idea of an IPO, as it became apparent that Sina Weibo might take a long time to become profitable and a separate series of accounting scandals rocked the broader sector of US-listed Chinese stocks.
But those problems now seem more like a delay than an actual setback, with Sina’s latest quarterly results showing strong progress for Weibo in its march to profitability. Sina’s shares jumped 5.9 percent in after-hours trade to $85.10 after its latest quarter results came out, reaching a high not seen for nearly 2 years.
The latest results looked rosy all around, indicating an advertising slowdown that shook China for much of last year may be starting to ease. Sina and other big Internet companies like Baidu (Nasdaq: BIDU) depend heavily on advertising for their revenue, with both firms getting 80 percent or more of their income from online advertisers. In Sina’s case, advertising revenue rose 17 percent in the second quarter to $120 million, roughly comparable to the first-quarter growth rate and well ahead of the anemic 7 percent growth in last year’s fourth quarter. (results announcement) Baidu reported similar trends in its latest results, with its advertising revenue growth showing relative stability over the last 3 quarters. (previous post)
But the bigger story for Sina is Weibo, which now boasts more than 500 million registered users and is considered China’s premier social networking platform. Weibo saw its ad revenues triple to $30 million, accounting for a quarter of Sina’s total advertising revenue. Weibo’s non-advertising revenue from value-added services like online games also nearly tripled to $7.7 million, showing the platform can develop a more diversified revenue base than its parent.
Thus Weibo’s revenue totaled nearly $40 million for the quarter — meaning the unit could be on track to earn $200 million or more this year. That number, while still relatively small, is starting to look like the kind of figure that Weibo needs to eventually become profitable, an important milestone that could now happen within the next year if the current growth continues.
So against the backdrop of all this upbeat news, the big question becomes: What do the next 2 years hold for Weibo? To quickly recap, Sina previously sold 18 percent of Weibo to e-commerce leader Alibaba in April for $586 million, valuing Weibo at $3.3 billion. As part of that deal, Alibaba also got the option to boost its Weibo stake to 30 percent later.
I expect we’ll see Weibo announce a move into the profit column on an operating basis around the first quarter of next year. Shortly after that happens, look for Alibaba, flush with cash from its upcoming multibillion-dollar IPO, to exercise its right to buy the additional 12 percent of Weibo, raising its stake to 30 percent. I would expect Alibaba to pay a nice premium for the additional stake, pushing Weibo’s value to $5 billion or more.
Of course the end game in all of this is a separate listing for Weibo, which is most likely to occur in New York. Barring any sudden market downturns, I would expect that listing to come toward the end of next year, valuing Weibo even higher in the $7-8 billion range. When one considers that Sina’s current market value now stands at around $5.6 billion, that means we could see a lot of upside for the company’s shares over the next 1-2 years as hype begins to build towards the blockbuster Weibo IPO.
Bottom line: Sina Weibo could become profitable on an operating basis by early next year, with an IPO possible as soon as late 2014 valuing the unit at up to $7 billion.
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