2023-11-09 11:29:37 ET
Summary
- WB's Q3 2023 revenue came in below expectations, and economic weakness in China is likely to have been a major reason for the top-line miss.
- But Weibo still achieved a +4% earnings beat for the recent quarter thanks to good cost control.
- I stick with my existing Hold rating for WB, after considering both its recent quarterly performance and its current valuations.
Elevator Pitch
My investment rating for Weibo Corporation ( WB ) stock is a Hold.
Previously, I evaluated Weibo's top line growth prospects and the way the company allocates capital in my earlier June 30, 2023 update .
For this latest article, my focus is on the assessment of WB's most recent quarterly financial performance. I view Weibo's Q3 results as mixed, and WB's stock seems to be at slightly above fair valuation. Therefore, I am of the opinion that a Hold rating for Weibo is justified.
The Market Expected WB To Achieve A Good Set Of Results In Q3
Prior to the company's Q3 2023 earnings announcement on November 9 before trading hours, the sell-side analysts predicted that WB would have achieved sequential growth in revenue and earnings the recent quarter.
According to the consensus financial estimates taken from S&P Capital IQ , Weibo's top line was estimated to increase by +1.4% QoQ from $440.2 million in the second quarter of the current year to $446.4 million for Q3 2023. This would have meant that WB's YoY revenue contraction moderated from -2.2% for Q2 2023 to -1.6% in the third quarter of this year.
The sell side also forecasted that the normalized earnings per share or EPS for Weibo should have expanded by +3.8% QoQ and +10.0% YoY to $0.55 (source: S&P Capital IQ ) for Q3 2023.
Spotlight On Revenue Miss And Potential Competitive Threat
WB issued a press release disclosing the company's financial results for the third quarter of 2023 on November 9 before the market opened. Top line for Weibo increased by +0.5% QoQ to $442.2 million in Q3 2023. The company's Monthly Active Users or MAUs also grew by +1% from 599 million as of end-Q2 2023 to 605 million as of September 30, 2023.
However, WB's third quarter revenue still fell short of the sell-side analysts' consensus sales projection by -1%.
One factor contributing to Weibo's below-expectations Q3 revenue is negative foreign exchange effects. WB's headline top line contracted by -3% YoY in the third quarter of this year, but Weibo's constant-currency Q3 2023 revenue actually rose by +2%. In other words, Weibo's headline revenue was affected by the weakening of the RMB relative to US.
Another factor responsible for WB's third quarter revenue miss is macroeconomic challenges as detailed below.
Prior to Weibo's actual Q3 earnings release, research firm TH Data had published a report (not publicly available) titled "Neutral On WB's 3Q23 Performance" on November 6. In this report, TH Data highlighted that "Weibo search index for the most popular 50 keywords" decreased by -9.6% YoY in the most recent quarter based on its proprietary data. TH Data's research also indicated that WB's ranking for Apple ( AAPL ) "iOS downloads in the SNS (Social Networking Service) category" declined between the second quarter and the third quarter of this year. Specifically, China's "slower than expected economic recovery" was cited as the main reason for Weibo's weaker metrics in Q3 2023 as per the November 6 TH Data research report.
Looking beyond short term revenue headwinds resulting from weak economic conditions in China, there are long term competitive threats for Weibo that can't be ignored. A key competitor for WB is Xiaohongshu, a Chinese company which describes itself as "a lifestyle platform" in China that is among "the most popular destinations for making lifestyle decisions" which "integrates the authentic content shared by its community with commerce" on its corporate website.
Japanese stock brokerage Nomura ( NMR ) Securities International came up with a research report (not publicly available) titled "Takeaways From Xiaohongshu Expert Call" that was issued on November 7. An expert in the Chinese internet space interviewed by Nomura noted that Xiaohongshu "has gained share in the ads business" at the expense of Weibo, particularly in the luxury market which accounts for a high single digit percentage of WB's advertising revenue as outlined in the November 7 NMR report.
In a nutshell, there is uncertainty over Weibo's revenue growth prospects in the near term and long run due to macroeconomic weakness and competitive risks, respectively.
Earnings Beat Was Driven By Lower Expenses
Weibo's normalized EPS expanded from $0.50 in the third quarter of 2022 and $0.53 in the second quarter of 2023 to $0.57 for the most recent quarter. The company's Q3 2023 bottom line beat the market's consensus earnings forecast by +4%.
Since WB didn't achieve a positive surprise with its recent quarterly revenue, it was lower than expected expenses that boosted the company's Q3 bottom line. In specific terms, Weibo's total expenses declined by -3% QoQ and -7% YoY to $308.2 million in Q3 2023.
One reason for WB's decline in total costs for the recent quarter was the weaker RMB vis-a-vis USD. Weibo's revenue and expenses are largely denominated in RMB, but the company reports its financials in USD.
Another reason for Weibo's lower expenses on both a sequential and year-on-year basis is the "decrease of personnel related costs" as mentioned in the company's Q3 2023 earnings release. In the company's third quarter results announcement, WB also noted its "solid execution of our efficiency initiatives."
It is encouraging to see Weibo exhibiting strong cost discipline in the face of a challenging macroeconomic environment, and this has paid off in the form of a Q3 2023 earnings beat.
Nevertheless, a "high quality earnings beat" tends to be accompanied by both above-expectations revenue growth and better-than-expected profitability improvement. In that respect, I don't deem WB to have delivered a "high quality earnings beat" in the third quarter.
Shares Aren't Undervalued
Year-to-date in 2023, Weibo's shares have dropped by -36.4% as compared to a +14.6% rise for the S&P 500. But I still don't think that WB stock is undervalued.
Weibo's consensus forward next twelve months' normalized P/E of 5.4 times (source: S&P Capital IQ ) appears to be undemanding. But WB's consensus FY 2023-2026 normalized EPS CAGR estimate is a modest +4.5% as per S&P Capital IQ data.
This works out to be a Price-To-Earnings Growth PEG multiple of 1.2 times for Weibo. If one uses the rule of thumb that a PEG of 1 is fair, WB is slightly overvalued.
Concluding Thoughts
I have a Neutral view of Weibo, which translates into a Hold rating. Weibo stock isn't below fair valuations, and the company's recent Q3 2023 financial performance is mixed.
For further details see:
Weibo: A Mixed View After Q3 Results