Here's Why Sina Corporation Is A Sell

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Jun 12, 2015

Sina Corporation (SINA, Financial) is an Internet & Software technology company that operates in the People's Republic of China, delivering content across all screen sizes varying from desktop to handheld devices. Investors are sitting on year-to-date gains of roughly 55%, with significant jump coming in after May 29 as insider purchases have fueled growth. SINA Chairman and CEO Charles Chao planned to buy 11 million newly issued shares for $456 million, and the stock has been soaring since then and hit a new 52-week high in 2015.

After such a strong momentum, we need to see if the same can be sustained or this is just a short-term spike. Let’s take a look at underlying business and future prospects.

First-quarter fiscal 2015 numbers

Consolidated sales grew 8.8% year-over-year to 182 million, beating Street’s expectation by $1.28 million. The growth in top-line was driven by 11% year-over-year growth in advertising revenue to $150.4 million.

The advertising revenue growth was driven by an increase of $27.3 million in Weibo advertising revenues partly offset by $12.7 million decline in portal advertising revenues. Weibo revenues witnessed 42.6% year-over-year jump to $96.3 million while portal revenues 15.1% year over year to $88.3 million.

Gross margin witnessed 200 basis points decline to 58%. Also, operating expenses inched up to $119.6 million versus $104.4 million in the year-ago quarter. The increase was due to increased personnel costs and marketing expenditures.

As a result, earnings per share came in at $0.04 per share versus $0.15 per share for the same period of last year.

Headwinds

Sina is facing a few headwinds that are hampering its growth. For example:

  • There are significant restrictions on online search and other social-networking activities in China. For example, Sina was warned by the Cyberspace Administration of China regarding a series of complaints about offensive and distorted content.
  • Growing popularity of WeChat will hurt Sina’s user base growth.
  • Increasing competition from the likes of Sohu.com (SOHU, Financial), NetEase (NTES, Financial) and Youku Tudou (YOKU, Financial) in the video and brand advertising market segment.
  • Continued migration of traffic from PC to mobile is leading to a decline in portal revenues. This is evident from the fact that mobile ad revenues accounted for 58% of the total advertising revenues versus 54% in the same quarter a year ago.
  • Macroeconomic headwinds which is lowering the advertising spending by large brand.

Fixing the problem

  • Sina focused on SME customers for advertising revenue. The customer base for this segment has grown 21% year over year to 388,000.
  • As Sina continues to spend on mobile initiatives, the company expects that the growth in mobile traffic will more than offset the decline in portal revenues.
  • Focusing on vertical expansion to diversify revenue growth and the business opportunities. However, near-term challenges will still prevail as these investments are only going to show results in the long-term.
  • Investing on finance channel to make it more product-oriented.

Equity dilution

As I mentioned in the beginning, the announcement that the company's CEO and chairman of the board was buying $456 million worth of stock in a private placement has pushed the stock up to a 52-week high. I don’t see this as a “confidence of management in the company” that many bulls would argue. If the management is so confident, why not buy from the open market and reduce the outstanding share count? After all, Sina has $2.06 billion in cash versus $800 million in debt. The company could easily pay off the debt and also buy back shares from the open market.

After the process is completed, the equity will be diluted by 11 million shares and taken it beyond all time high by close to 5 million shares. Dilution of equity will mean the bottom line will be hurt for few quarters to come unless earnings grow at a faster clip than the dilution.

Wrapping up

Equity dilution is not a positive sign as it will hurt the bottom line in the upcoming quarter(s). I would have been bullish had the shares been purchased from the open market. Loss of brand customers is a credible concern, and the company remains in a state of secular decline.

Whereas ecommerce, ebanking, online payment and online entertainment services markets growth potential in China remain a tailwind, investments to capture these segment will also hurt in the near term.

With the stock having seen a sharp rally and headwinds faced by Sina, this is the right time to exit this stock and book profits. So, Sina is a SELL as of now. If you don’t have this stock, wait for a pullback.