Weibo Pins Hope On Olympics To Boost Its Advertising Revenue

Key Takeaways:

• Weibo’s first-quarter revenue fell 4%, hit by declining income from advertising and value-added services
• The company is banking on the Olympics and summer vacations to boost revenues later in the year

By Fai Pui

It’s a familiar story in the business world: a pioneering company stakes out a new market but after a few years comes under pressure from new kids on the block.

Such is the case for Weibo Corp. WB, one of China’s earliest social media platforms. The microblogging site launched nearly 15 years ago as a popular forum for news and comment about celebrities in the media spotlight. But trends move quickly in the social media sphere, where sites such as Douyin, Kuaishou (1024.HK) and Xiaohongshu have gained large followings in recent years.

Competition from newer entrants specializing in video or streamed content is making a dent in Weibo’s earnings. In late May, Weibo reported that its revenues fell 4% to $396 million in the first quarter from the same period a year earlier, and were flat when adjusted for exchange rate moves. Its net profit plunged 51% to $49.44 million, although the drop was just 4% to $107 million on a non-GAAP basis.

Attracting advertising revenue has been a challenge for many major social media platforms in recent years. China’s sluggish economic recovery is a key factor in that trend. But more established sites such as Weibo are also losing a large chunk of advertising income to the newer challengers in the social media market.

Weibo’s revenue from advertising and marketing fell 4% last year. The figure did rise 3% in the fourth quarter of last year but lapsed back into negative territory in the first quarter. In the first three months of this year, advertising and marketing revenue fell 5% from the same quarter a year earlier to $339 million, which was 16% less than in the prior quarter. Excluding advertising revenue from Alibaba, the first quarter total fell 6% to $337 million. Meanwhile, money coming in from the value-added business, which includes membership services, online gaming and social commerce solutions, fell 3% from the same period of last year to $56.55 million.

However, costs constraint helped Weibo’s margins. First-quarter operating profit rose 3.3% to $99.7 million, while operating profit margin increased by two percentage points to 25% from the year-earlier period, as costs and expenses fell 7% to $296 million.

As an industry veteran, Weibo has unsurprisingly experienced slowing growth in its active user base. Its monthly active users stood at 598 million last December, a net increase of about 11 million. But the number slipped to 588 million in March. Daily active users fell from 257 million to 255 million during the same period. More importantly, Weibo has hit an obstacle in monetizing its user base.

Weibo was once the natural home of beauty product bloggers and the epicenter for brand advertising campaigns. But many bloggers and influencers have pivoted to short-video, live streaming and e-commerce channels on the likes of Douyin, Kuaishou and Xiaohongshu. In the battle against the upstarts, Weibo is hampered by a lack of live-streaming elements. The company also admitted that waning custom from the beauty product industry had delivered a blow to its revenues in the first quarter.

Weibo is also losing ground to short-video platforms when it comes to entertainment advertising. While most films are promoted on Weibo, rival Douyin is becoming the advertising platform of choice for the cinema industry. For example, Douyin held a red-carpet event last year in a direct challenge to Weibo’s flagship movie award ceremony.

Going Vertical For New Ad Business

Facing growing competition, Weibo Chairman Charles Chao and CEO Gaofei Wang have been actively exploring business verticals, ploughing money into auto, digital and gaming arenas and offering price discounts to relevant advertisers. According to a report issued by Weibo last year, these vertical fields accounted for 41% of content, while the number of related content creators had risen 14% and the average number of daily searches jumped 82% year on year.

The shift of direction makes sense to investors, but they are worried about the scope for making money. Weibo exposes users to brand advertisements by answering their searches, leaving it reliant on interaction, while short-video platforms employ a very different strategy that depends on users responding to an advertisement.

Nonetheless, Weibo executives are upbeat about the latter half of the year, when they expect the summer Olympics and the holiday season to bolster advertising revenue. The gaming sector could also be an advertising driver. Weibo is hoping to increase the sales rates attached to hit content such as film, TV and sports events, while promoting brand launches of new cars, phones and other products, as well as investing more to optimize algorithms.

But investors have cooled towards Weibo as new platforms have crowded into the market. The company’s U.S. stock price fell nearly 40% over the past year and its market cap has been hovering around $2.1 billion, 92% down from highs in 2018. The company’s price-to-earnings (P/E) ratio stands at only 7 times, far below social media giants such as Meta META, Snap SNAP and Kuaishou with ratios ranging between 32 and 142 times.

Investment banks and brokerages mostly consider Weibo to be undervalued. UBS has reaffirmed a “buy” rating, predicting advertising revenue will pick up in the second half due to the Olympic Games. The investment bank forecasts a 5% revenue increase in the third quarter and a 7% rise in the final quarter of the year. The bank believes the revenue downside is limited, with a forward price-to-earnings (P/E) ratio for Weibo of only 5 times and slower advertising growth than its peers already baked in. UBS has thus specified a target price of HK$90, around a third higher than the current trading level.

BOC Securities is also bullish about better advertising revenue growth in the second half of the year, driven by the Olympics and higher demand for recreational activities during the summer months. It expects the company’s non-GAAP net profit to come in at $431 million this year, rising to $482 million in 2025 and $511 million in 2026. With corresponding Weibo P/E ratios of 5.2 times, 4.8 times and 4.52 times, the bank maintains an “overweight” rating for the stock.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.