Weibo's Pre-IPO Round

| About: Sina Corporation (SINA)

As I have speculated for the past six months, one of the big Chinese Internet three took a stake in Weibo. Those following the Sina (NASDAQ:SINA) saga know it had to be either Baidu (NASDAQ:BIDU) or Alibaba, and it seems Alibaba won out. That being said, the stock has still disappointed, and remains in my opinion one of the most attractive publicly traded (indirect of course) web assets on the planet relative to its present valuation. With Alibaba's investment being valued at $3.25 billion, Sina now has a negative enterprise value. Of course this doesn't mean you should go out and buy the stock, but if you think this through you do have to scratch your head a bit.

Sina management knows that a Weibo IPO will be a big hit, and according to some industry sources, all decisions being made are geared with that in mind. (Not that you have to be a rocket scientist to figure that out.) See, the challenge for Sina has been resisting monetization pressure so as to not sacrifice user engagement. For a while, the Street has given them the benefit of the doubt, but lately, with Tencent knocking on the door with its Wechat service, investors have grown impatient. Consequently, the stock has suffered. The goal had clearly been to get to critical mass to maximize an IPO, and deep pocketed Tencent's competition has thrown a wrench into those plans. So while most people are focusing on the valuation and size of Alibaba's investment, what I think is more interesting here is the revenue guarantee Weibo has extracted from this partnership. With Alibaba committing to channel $127 million a year in advertising and social commerce revenue to Weibo you now have a company that is probably at a $240 million plus annual revenue run rate. These types of deals as we have seen with Expedia (NASDAQ:EXPE)/TripAdvisor (NASDAQ:TRIP) are precisely what you need to pull off an early stage float, and I assure you this is what both Alibaba and Sina have in mind here. My guess is Alibaba management figures its 30% stake will be worth at least double upon floating thanks to their revenue agreement. Which brings me back to the stock...

Sina's current market cap is $3.67 billion. Back out the cash and the whole enterprise is worth about $2.9 billion. Now subtract another $600 million for the stake sale and you get to $2.3 billion. Sina's remaining stake in Weibo is worth about $2.7 billion on paper. That means Sina's portal business is worth about negative $400 million. Of course, I don't believe Weibo will IPO at such a low valuation. My guess is at such an early revenue growth stage Weibo will garner as little as 25x sales and as much as 50x sales. At $200 million plus in revenues you are looking at something closer to $5 billion to $10 billion or basically $1.75-$6.75 billion more in value of which Sina will retain 70%. So you are talking between $1.2 and $4.72 billion, and this would be after Alibaba exercises their option to buy another 12%. Which, by the way will be at a higher valuation as this is how these deals are typically structured, but assuming that is not the case you are talking another $360 million. This kicks up the range to $1.56-$5.1 billion or roughly $24-$77 a share in Sina value being left on the table after assuming the portal business has a negative value of $6 a share, which is not the case. Anyway, this is all very subjective stuff, but my point is as long as web properties trade where they are roughly trading this is a grossly undervalued asset. And to be more specific, looking at how this deal was put together it would appear both parties have reached an agreement that allows for maximum unlocking of Weibo value sometime in the immediate future as management's stake in Weibo is more significant than their non-material position in Sina. Considering the cash Sina has on hand they needed a $600 million infusion like Dubai needs new skyscrapers. Take this deal for what it really is - revenue dressing for an IPO.

Disclosure: I am long SINA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Internet Software & Services, Buyside Insight, China,
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