Earnings Make this Company a Strong Buy
Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sina (NASDAQ: SINA) has comprehensively beaten earnings estimates with its recent quarterly results. The company continues to do well in a weak economy and an increasingly competitive market. It faces competition for advertisement revenues from companies such as Baidu (NASDAQ: BIDU), Facebook (NASDAQ: FB) and Twitter. I believe the stock is still a buy despite recent rallies and is an ideal investment to benefit from growth in online advertisement.
Sina is China’s largest provider of social and mobile value added services. The company has 3 primary platforms which are SINA.com, Weibo.com, and SINA Mobile. Sina.com is a media channel which provides updates on news, sports, finance, entertainment, luxury, videos, music etc. Sina’s micro blogging platform, Weibo.com, is pretty similar to Twitter. It allows users to follow topics, discussion and notable celebrities etc. SINA Mobile is a portal for downloading ring tones, mobile games, pictures and also provides access to dating and friendship communities. Other important products being offered by Sina include SINA Game, SINA eReading, SINA.net, SINA Mall.
Sina reported its 4th quarter earnings on Tuesday. The market was expecting the social media company to report an EPS of $0.05 on revenues of $133.9 million. The company stock jumped approximately 6% after it comprehensively beat EPS estimates, reporting a profit of $0.13 over revenues of $139.1 million. Although higher than estimates, this was still a 39% decline y/y and if we include extraordinary items the EPS comes down to a meager $0.03 per share. The net income has decline from $9.3 million in the same quarter last year to $2.4 million in 4Q2012. This rally on earnings still only partially offsets the 13% percent Sina stock depreciated in the 4th quarter.
The Chinese markets have been showing higher growth rates as compared to Europe and North America. This is both due to a combination of better economy and the fact that Chinese markets are still not mature. According to iResearch the Chinese online advertisement market grew by 57.6% last year and a healthy 46.8% in 2012. This allowed Sina to easily meet its overall revenue projection for the quarter with advertisement revenues of $110.7 as compared to its own guidance of $110-$112.
A major reason for the earnings rally was the positive outlook for the next quarter. Sina expects revenues for 1Q2013 to be in the range of $115-$119, which is pretty much similar to street expectations of $117. The company also expects to generate approximately 81% of its total revenues from advertisement, as compared to 79% in 4Q2012.
In a recent article I discussed the huge potential of the online advertisement industry. According to sell side estimates the internet advertisement industry would cross $40 billion in a couple of years. Facebook and Baidu are not direct competitors of Sina because they have different business models. However when it comes to competing for advertisement revenues these are the biggest players in the market.
Facebook stock has appreciated by approximately 45% in the last 6 months on positive mobile monetization and growth in advertisement revenues. The company reported in its last quarter earnings report that it has increased mobile revenues to a staggering 23% of all revenues. This growth in mobile however did not translate to better overall earnings due to a 9% decline in desktop revenues. Another major contributor to flat revenue was the decline in ad pricing due to macroeconomic pressures.
As compared to Facebook, the stock price of Baidu has shed almost 30% in the last 6 months. This has been due to a more adverse macroeconomic impact and slower mobile monetization. Despite these issues, Baidu is still the largest player in Chinese online Advertisement market. The company has more than 400K advertisement customers and an extremely diverse customer base. Comparatively the customer base of Sina is much more focused because its target market is mostly in the younger age groups.
Sina has easily beaten expectations which earnings and has provided a rosy outlook for the next quarter. The company is focusing on expanding revenues of its Weibo platform. The new Weibo products have drawn much interest from both users and investors. During the quarter the company has launched two new Weibo products. One of these new products aims at linking micro bloggers with advertisers and the other one allows advertisers to promote their tweets to audiences not actually following them.
The stock is currently trading at a P/E of 13x and 27% below its mean sell side target price of $120. The company has significant upside potential based on its valuations and overall growth in online advertisement. Sina is currently targeting the fastest growing economy in the world and also operating in the fastest growth industry i.e. online advertisement. This industry has the potential to drive away a large portion of advertisement revenues away from TV industry. Therefore, I consider Sina a top investment candidate despite recent earnings rally.
SmartEquity has no position in any stocks mentioned. The Motley Fool recommends Baidu, Facebook, and SINA . The Motley Fool owns shares of Baidu and Facebook. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!