Saturday, February 4, 2012

How Much is SINA Worth?

It is an understatement to say that the future of SINA lies with Weibo.

SINA, one of the largest media portals in China, is transforming itself into a Twitter-Facebook hybrid. Starting out as a Chinese version of Twitter, Weibo is on its way to becoming the Chinese version of Facebook. Sina Weibo has taken China by storm, gaining 250 million registered users in 2 years and showing no sign of slowdown. This is compared to 485 million internet users in China and 800 million users of Facebook.

With all the buzz, shares of SINA, however, are not considered bargains by traditional valuation standards. SINA, on February 2, 2012, was valued at $4.86 billion in the US stock market, with a forward PE ratio over 60. Has its shares price gone ahead of itself or this is just the beginning of a super growth stock?

In other words, how much is Weibo worth and how much has been priced in? I am not here to throw a single number out but instead I would like to find out, by a reasonable stretch of imagination, whether there is any room to the upside from its current market valuation.
Valuation 1: Taking away Sina's value as a media portal , how much is it worth?

As of February 1, 2012, the market capitalizaion of SOHU was $2.28 billion versus SINA at $4.86 billion. The estimated revenue of for SOHU in 2011 was $850.33 million versus $464.99 million. That leaves a Price-Sale ratio of 2.68 for SOHU. With the same multiple, SINA should have a market cap of $1.25 billion. That means SINA weibo reaps a market cap of $3.61 billion. Can it be worth that much? Since SINA weibo currently has no revenue, I will use a social media benchmark for a reasonable multiple.

Valuation 2: Comparisons with American peers, Facebook and Twitter

Both Facebook and Twitter are not yet publicly traded, thus rendering their valuations a guessing game. A recent private investment indicated Twitter valued between $8 and 10 billion while recent trading on SharesPost showed a value between $6.8 and 7.7 billion. Facebook, is valued between $70-$100 billion depending on the sources. Given an estimate of 2011 revenue of $140 milllion  for Twitter and $4 billion for Facebook, the price-to-sales multiple of Twitter is much higher than Facebook. Leaning to the conservative side, I use only Facebook as the benchmark. Considering the prejudice against Chinese concepts just very recently, 50% discount of Facebook's multiple for is assumed forWeibo.

As you can see from Figure 1 (click on the image to a larger view), assuming SINA without revenue from businesses other than Weibo and ignoring discounting, Weibo will have to reap a revenue of $600 million,$500 million, $400 million for a multiple of 7.5, 10 and 12.5 respectively to justfify any upside in market capitalization. Are these possible? Let's look into Weibo's monetization.

What could be the revenue?
The biggest bang of Weibo monetization will come from its experimental business platform similar to Facebook page that caters to businesses' connecting directly with users and a spread of words among users. According to SIG analyst, Chunming Zhao's calculation, annual revenue of Weibo when the business platform is executed will be as much as $1 billion. This calculation assumes Weibo gets 150,000 business users (half of what Baidu currently has) and 40,000 RMB per customer (Baidu's average revenue per user (ARPU)). This is used as the upper limit of revenues in the second valuation.

From the above exercise, it is not totally unreasonable for SINA to have more upside, and possibly a big one if its plan to monetize Weibo follows the path of Baidu, Twitter or Facebook. Of course, skeptics could say it is a big “if"

Disclaimer: I have no position of SINA in my personal account as of 2/4/2012. However, I may have distributed the information to friends, family and affiliates prior to the post. My friends, family and business affiliates may have positions in stocks I mention.

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