SINA can be considered a social network stock in the making, because eventually Weibo will replace sina.com as the main revenue component. SINA’s cash cow is advertising revenue from sina.com and Weibo. In 2011, it reached $370 million and this year SINA may obtain more than $500 million only from ads. According to the latest earnings call, net revenue for this year is so far $126 million, representing 19% growth year over year. $19 million came from Weibo alone.
If you remove Weibo’s contribution, advertisement revenue would have declined by 4%. This shows that although Weibo’s contribution is still small, it is the main revenue growth driver. Notice also that Weibo contributed significantly to non-advertising revenues: $5 million in gaming fees and $2 million in membership fees, thus helping to make revenue more diversified. SINA has also entered into a partnership with Alibaba to further strengthen Weibo’s monetization.
According to the latest earnings call, non-GAAP advertising gross margin for the first quarter was 50%, up from 45% for the same period last year. This reflects the scalability of SINA’s advertising model. The downside is that non-GAAP operating expenses for the first quarter of 2013 were $69.8 million compared to $64.1 million for the same period last year.
After analyzing four social network stocks including the extremely popular Facebook and LinkedIn Corp (NYSE:LNKD), I recommend SINA as the best pick in terms of expected return and limited downside risks. Facebook and LinkedIn Corp (NYSE:LNKD) are more popular in North America but they already own superb products. SINA, on the other hand, represents a success in the making: it owns Weibo and due to the amazing growth rate it has experienced in its user database, it is realistic to assume that in the next years it will become the main revenue growth driver. Furthermore, considering that the company is still experimenting with various monetization approaches (and already seeing some success), I believe that there is a lot of room for improvement in terms of margins. A Weibo IPO is not hard to imagine, considering that it is the main revenue growth driver at the moment. If Weibo obtains a moderate 30 times sales valuation at the IPO, it could be worth $6 billion, assuming that annual revenue will come out at $200 million this year. SINA will retain 70%, which is more money than its current market capitalization.
Also, notice that unlike LinkedIn Corp (NYSE:LNKD), SINA is not overvalued, and unlike Facebook, SINA is prepared for mobile. As advertisers shift from the web to mobile apps, Weibo will become a cash cow in SINA’s portfolio. Finally, unlike Renren, SINA is profitable and owns a respected and well-monetized media site, which limits downside risks.
The article Choosing the Best Social Network Stock originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and SINA . The Motley Fool owns shares of Facebook and LinkedIn. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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