Sina’s Growth Should Surprise No One
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Shares of the China based social networking firm Sina Corp (NASDAQ: SINA) went up by 12% on Thursday as the company recorded a three-fold increase in profits from $10 million in the previous quarter to $33.2 million for Q2. The Thomson Reuters average of analysts had vastly underestimated Sina’s performance, forecasting a loss of $1 million. Operating profit was down year over year as their increased top line revenue (+10% YoY) was reinvested into R&D, which is now 20% of gross revenue versus just 12% a year ago. Backing that increase out and Sina’s operating margin increased to 8.0% from 7.2%, a very healthy sign for future growth.
Sina owns China’s version of Twitter called ‘SinaWeibo.’ Saying that, however, is like comparing Yahoo (NASDAQ: YHOO) with Google (NASDAQ: GOOG). Twitter has gathered just half of the number of users as SinaWeibo, whose users have been uploading images and videos on their Weibo account for a long time, something Twitter users have only just started doing. Almost a quarter (22%) of the Chinese internet population uses SinaWeibo. It has also attracted thousands of Chinese celebrities and hundreds from around Hollywood, including Tom Cruise, who has more than 4 million followers on Weibo, compared to about 3 million on Twitter.
Tencent is often considered Sina’s biggest rival. With a market value of about $59 billion, Tencent is the biggest Chinese internet company, offering a variety of internet services to its users, including the popular online messaging service QQ, which boasts more than 700 million users. Tencent’s micro-blogging platform, Pengyou, is neither as popular as Sina Weibo nor growing as fast. Tencent’s focus is not on Pengyou, however. It has recently successfully moved into online gaming and has worked in collaboration with Activision (NASDAQ: ATVI) to bring ‘Call of Duty’ to China. Their most recent earnings report showed a 32% increase in net profits, which were $492 million.
SinaWeibo is, without doubt, the market leader when it comes to social networking in China. However, compared to Baidu (NASDAQ: BIDU), the Chinese search engine giant, Sina is still a small player. With approximately $45 billion in market value, Baidu is nearly 12 times larger, however, Baidu’s core business continues to be the search engine. Last year, it had launched its own microblogging platform, “Baidu Shuoba,” which attempted to go up against Sina Weibo and was shut down quickly. That is one thing about Baidu--they are not shy about admitting failure and moving on.
The two companies have learned their lessons and have been working together; in fact, Baidu was the first third-party search engine that was used by Sina Weibo. Earlier this month, it was also revealed that Baidu and Sina will widen their collaboration for Sina Weibo’s mobile version. Sina’s microblogging app will also come equipped with ‘Baidu Cloud’ platform, which is the fastest growing part of Baidu’s business.
On the other hand, Renren, the Chinese equivalent of Facebook, is in direct competition with SinaWeibo. SinaWeibo’s user base grew by 13.6% in the 2nd quarter and stood at the end of June at 368 million. Renren has 162 million users representing just 5% growth over the previous quarter. The company’s advertising revenues have fallen by 10.5%, primarily due to the much larger user base of its competitors. However, Renren’s online gaming revenue has increased significantly (122%). Furthermore, unlike Facebook, Renren is developing its own games as opposed to farming out the task to the fading Zynga. The games also have a better ‘shelf life’ than Facebook’s, thereby promising a continuous stream of income in the future. Renren isn’t going anywhere and will remain SinaWeibo’s main competitor; however, it might need to push its user growth rate to double digits if it is to compete with SinaWeibo over advertising revenues.
Social media is booming in China and the country’s internet companies will continue to surprise the analysts. The McKinsey survey had revealed that 95% of the population of the country’s major cities are registered on a social networking site of some form or another. Not only that, it is also a very active online community, with 91% of respondents saying that they visited a social networking site in the past six months as compared to 67% in USA, 30% in Japan and 70% in South Korea.
Sina has stated that revenues may drop in the next quarter but are expected to start picking up from the fourth quarter as the company plans to launch a new version while expanding its ad revenue base. The management has high hopes for 2013 and has several new ideas, including sponsored posts, similar to what Twitter is doing now, while they look for ways to generate new revenue.
Unlike Facebook or Twitter in the U.S., SinaWeibo and other social networking websites are strictly monitored by the government in China. And, of course, there is the Great Firewall of China blocking the coming of both Google and Facebook, allowing companies like RenRen, Tencent and Baidu to grow in a less competitive environment.
In the recent murder trial that involved GuKailai, wife of a former Communist party leader, SinaWeibo’s users found it difficult to post messages that involved the names of Kailai or her husband. Sina had said that this was due to a “technical error.”
It would be interesting to see the impact such actions have on user growth rate, which will be clear in the next quarter’s filings. However, it is likely that there isn’t going to be a sharp drop. In March this year, the Chinese government had forced Sina to disable the “comments” function for several days following rumors of a “military coup.” The 13.6% increase clearly shows that the censorship measures did not have any negative impact on SinaWeibo’s capability to attract new users. Such is the power of even a restricted form of this type of communication. While officially banned in China, there are more than 700,000 Facebook users who circumvent the restriction via VPN’s and other measures to communicate freely.
Since the beginning of the year however, Sina has underperformed as compared to its Chinese competitors with Baidu and Renren rising 15% and 13.8% respectively, while Sina has risen just 9.0% so far in 2012. The latest earnings report, however, has the stock rallying constructively on massive trading volume, wiping away the bad taste from Q1. Currently trading at a multiple of 15 with underlying margin expansion, Sina is trading like a value stock while its expansion of research into its API is what will fuel its future growth into a market that is still expanding rapidly.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard, Baidu, and Google. Motley Fool newsletter services recommend Activision Blizzard, Baidu, Google, and SINA . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.