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Weibo: Should You Bet on the Post-Earnings Rally?

The stock is up more than 6.7%

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Sep 28, 2020
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Shares of Chinese social media giant Weibo Corp. (

WB, Financial) popped more than 6.7% on Monday after the company's second-quarter results beat expectations.

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Weibo's parent company, Sina Corp, (

SINA, Financial), which will be exiting the U.S. stock market in the first quarter of 2021, also saw its stock rise by more than 6%. Sina is going private after accepting a $2.6 billion offer from CEO Charles Chao.

Despite the sharp rise, the stock remains more than 30% down this year. This suggests that there could be an opportunity to extend Monday's gains in the coming days. However, it is important to look closely at what the numbers indicate before committing.

Highlights from recent results

Weibo reported net revenue of $387.4 million, which reflected a 7% decrease from the same period last year— on a constant currency basis. The company's top line outperformed the consensus analyst estimate of $379.9 million.

Earnings of 50 cents per share also beat expectations of 46 cents. This reflected a 26.47% decline from the same period a year ago. CEO Gaofei Wang said there was a significant improvement in the company's top line in second quarter compared to the first quarter, which was significantly affected by the Covid-19 pandemic.

"With the COVID-19 pandemic situation in China largely brought under control, we are glad to see the solid recovery of our brand advertising business in the second quarter, with more brands embracing our differentiated social marketing solutions to connect with a broader audience on Weibo," Wang said.

Weibo added 37 million monthly active users during the quarter compared to the same period a year ago. The company reported 528 million monthy average users as of June, with mobile MAUs accounting for 94%. Daily active users increased by 18 million on a year-over-year basis to 229 million.

Valuation

Weibo appears to have made a good transition from desktop devices to mobile, which is a key requirement for social media companies looking to boost user engagement in the current business climate. This will help to boost the company's long-term outlook.

From a valuation perspective, shares of Weibo are trading at a trailing 12-month price-earnings ratio of 20.09. In comparison, fellow Chinese technology giants Tencent Holdings Ltd. (

HKSE:00700, Financial) and Baidu Inc. (BIDU, Financial) trade at price-earnings ratios of 41.56 and 84.22.

The company's forward price-earnings ratio of 12.76 is also more appealing than Tencent's 28.25. However, it is slightly outperformed by Baidu's multiple of 11.98. But when we factor in long-term earnings growth for the next five years, Weibo's price-earnings to growth ratio of 1.27 again proves to be the most competitive among the three stocks. Tencent's equivalent stands at 1.68, while Baidu trades with a PEG ratio of 2.31.

Disclosure: No positions in the stocks mentioned.

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