Weibo Plays With the Big Boys in Numbers, But Investors Still Worry

Key takeaways:

• Weibo’s revenue rose above pre-pandemic levels last year, but its profitability lagged due to heavy spending
• The company trails Meta in its ability to monetize users, and is very much in the shadow of local rival WeChat in terms of total user numbers

By Ken Lo

Weibo Corp. WB, often called the Twitter of China, has reported strong revenue growth for 2021, showing it can play with the big boys, including the real Twitter TWTR and other major global peers. But like those same rivals, the company faces the far larger challenge of not only in attracting new users, but squeezing more money out of them to boost its profitability. It also faces more unique challenges due to its limitation to China, a huge but also sometimes challenging market due to strict government oversight.

The company reported revenue of $2.26 billion last year, up 33.6% compared with 2020. Its net profit grew by an even larger 36.7% to $428 million. All that seems fine, until you consider the low base figure from 2020 at the start of the pandemic. In fact, last year’s revenue was 27.7% higher than pre-pandemic levels in 2019. But the company’s net profit declined by 13.4% over that period, showing its profitability has not fully recovered to pre-pandemic levels.

The shortfall owes to its big spending last year, totaling $1.56 billion to be precise. That was 30% higher than the roughly $1.2 billion average spending in the previous two years, as the company incurred heavier costs related to personnel and marketing. Such a spending jump on new initiatives is necessary given the need to maintain and consolidate its place in a China advertising market that remains unstable even as the pandemic eases.

Its advertising and marketing revenue totaled $1.98 billion last year, up 33.6% from 2020 and accounting for 87.8% of its total. Its second biggest revenue source was value-added services, which yielded $276 million last year, accounting for 12.2% of total revenue. The last three years have seen advertising as a share of total revenue hold steady at around 87%, lower than the 97.5% for Facebook owner Meta FB, the world’s biggest social media company.

Despite underperforming Meta in terms of profitability, Weibo beat out its original role model Twitter, which logged a loss last year. Weibo’s net profit margin was around 19%, lower than Meta’s 33.4%, mostly because of the noted increase in costs.

Low revenue per user

Given the similar business portfolios between Weibo and Meta, as well as their shared reliance on advertising, the two companies’ performance in terms of user monetization can be easily compared. Last year, Meta had revenue of $117.93 billion on 1.93 billion daily active users, equating to $61.10 per average user. By comparison, Weibo had 249 million active daily users, averaging a far smaller $9.10 for each.

Even when factoring in the five-times-difference in per-capita income between the U.S. and China, Weibo still has a lot of catching up to do in user monetization. Weibo also has a basic drawback to its global peers in its reliance almost exclusively on China, where regulatory risk is high, unlike Meta and Twitter that are globally diverse.

Weibo’s limited prospects are reflected in its valuation. The company’s latest price-to-earnings (P/E) ratio is 14.2 times, slightly lower than Meta’s 15.5 times. Its price-to-sales (P/S) ratio of 2.7 times is half of Meta’s 5.7 times, and much lower than Twitter’s 20 times, even though Twitter lost money last year.

To be fair, Weibo has unparalleled competitive edges in a massive Chinese advertising market that Meta, Twitter and most other global internet companies have avoided due to Beijing’s strict content oversight requirements. Its relatively diversified user base compared with more specialized social media platforms makes for more stable operating revenue, so that difficulties in one industry don’t take a big toll on the company. But Weibo is far overshadowed in China by WeChat, a social media platform owned by Tencent (0700.HK), in terms of users.

In the six years from 2016 and 2021, Weibo’s monthly active users grew 83% from 313 million to 573 million, representing an annual compound growth rate of 12.9%. By comparison, WeChat’s monthly active user base more than tripled over a five-year period from 300 million in 2013 to 1.1 billion in 2018, representing annual growth of 25.3% – more than twice that of Weibo. The growth has slowed since then due to market saturation, with the company now reporting 1.27 billion MAUs – roughly four times the size of Weibo.

WeChat’s approach to attracting users is different from Weibo’s, relying more on the use of applets and financial-related services that have helped to boost its popularity.

Weibo has realized its own shortcomings and is working to close the gap. It wants to draw more diverse and dynamic user groups by further diversifying its content. Prompted by the popularity of video, it is recruiting more video content creators in hopes of competing with the likes of far younger video apps like Kuaishou (1024.HK) and Douyin, the Chinese edition of TikTok. Weibo now boasts 46 vertical content fields including celebrities, entertainment, jokes, fashion, cosmetics, finance and gaming, where the number of daily viewers is growing about 20% annually.

Second listing in Hong Kong

Originally listed in the U.S. in 2014, Weibo made a second listing in Hong Kong late last year and raised around HK$1.9 billion ($244 million). It said it would spend 45% of the funds to expand its user base and user participation, while 25% would go to R&D and enhancing its user experience and monetization capabilities. All that shows the company sees improved user experience and content diversification as two top priorities.

The company’s purchase of an interactive entertainment company and online gaming businesses in the fourth quarter of 2020 are positive first steps to achieving those goals, and helped to drive a 36% rise in its value-added service revenue last year. Continuation of the trend could hinge on how quickly and efficiently it uses the funds from its Hong Kong IPO to make its platform more popular and better monetize its users.

U.S.-listed Chinese stocks have been haunted by the potential of forced delistings from New York in recent years, and Weibo was singled out as facing such a risk when its name appeared on a list published by the U.S. Securities and Exchange Commission (SEC) in March. The company’s stock fell a combined 6.4% in two days after that happened.

Despite rebounding somewhat since then, the HK$206.80 Monday close for the company’s Hong Kong traded shares represented a 24% decline from its Hong Kong IPO price of HK$272.80 just four months earlier. Last week the company announced a plan to buy back up to $500 million worth of shares in the next 12 months to shore up the price. But more diversification and better user monetization will be the real keys to winning back investors over the longer term.