A Fair Value Hike for Weibo
The narrow-moat firm's network effect with 392 million users will continue to drive sales growth and help protect against increasing competition.
We have upgraded narrow-moat Weibo’s (WB) fair value estimate by 29% to USD 106 per share due to strong user base growth (plus 25% in the fourth quarter), increased engagement amid less active users with interest-based feeds, an increasing number of advertisers (over 30% growth in SME and key accounts in the fourth quarter), increasing average revenue per monthly active user (plus 41% in the fourth quarter), and continuous operating efficiency (150 basis-point sequential and 860 basis point year-over-year increase in operating margin in the fourth quarter). We believe Weibo’s shares are now fairly valued.
In the next few years, we believe Weibo’s network effect with 392 million users will continue to drive sales growth and help protect Weibo from increasing competition. We believe management’s focus on interest-based information feeds and user-generated short-form videos, active user acquisition in the lower-tier cities, a new advertising system that enables more effective real-time bidding and personalized targeting, and the use of machine learning to improve the relevancy of feeds for users will drive user base and engagement. As a result, we expect an increasing number of SMEs and budgets shifting to social media from key accounts to drive sales going forward.
In the next decade, we forecast a 19% revenue CAGR, mainly driven by advertising and marketing revenue. Operating margin improvement will be slower in the next four years due to reinvestment into the platform amid competition and increase faster beyond 2021 as Weibo’s scale solidifies. We forecast operating margin to reach 38.6% by 2021, from 35.4% in 2017, before accelerating to reach 47.3% at the end of the decade. We have already factored in the increase in investments into channels, content, and product offerings, which will reduce pressure margins amid an increasingly competitive environment.
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Chelsey Tam does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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