In two days during January 2012, there was a 50 percent run-up in the price of Renren (RENN), the Chinese version of Facebook (FB), on rumors of a Facebook IPO valuation in the $85B to $100B range. The most recent surge in Facebook shares also caused smaller sympathetic spikes in Renren's shares, despite the fact that Renren is a separate company on the other side of the world, operating in a different political and economic climate.
If we assume that Twitter's Chinese counterpart Weibo is also similar enough to Twitter to warrant movement, it is quite possible that Twitter's pending IPO, announced last Thursday, could have a significant impact on Sina Corporation's (SINA) share price.
Sina Corporation is a Chinese online media conglomerate consisting of four main segments: Sina Mobile, Sina Online, Sina.net, and Weibo. Last April, a giant privately owned e-commerce company called Alibaba acquired an 18% stake in Weibo for $586M, which implies that Alibaba believes Weibo is worth $3.26B. Since Sina's current market cap is currently $5.35B, it follows that the remainder of Sina is worth $2.09B. To put that into perspective, consider that Sina didn't launch Weibo until 2009, and Sina's market cap in 2007 (before the global crisis in 2008) was $2.44B. This means that the remainder of Sina is either worth less than it was five years ago, that the market disagrees with Alibaba's assessment of Weibo's value, or that Sina is currently undervalued.
To determine whether the remainder of Sina is worth less than in 2007, consider that Sina's revenue in 2007 was $232M, and its revenue in 2012 was $524M. Weibo brought in $30M revenue last quarter, and since its revenues have been growing, it is safe to assume that Weibo brought in less than $120M over the past year. This means that the remainder of Sina brought in at least $404M, or 74% more revenue than in 2007, an 11.7% CAGR. Clearly, Sina minus Weibo is doing all right.
Twitter had 500 million registered users in 2012, who produced 340 million tweets per day, 60% from mobile devices. Of all of its registered users, Twitter is estimated to have some 200 million active users. Twitter brought in $100 million dollars of revenue last quarter, and is estimated by Forbes to bring in $600 million this year. Considering that Facebook's P/S ratio is about 18 and LinkedIn's (LNKD) P/S ratio is about 23, that means that Twitter could go for somewhere between $7.2B and $13.8B. In fact, Twitter has already traded on private secondary markets for $9B to employees of BlackRock (BLK), and Forbes estimates that it could go for as high as $16B, assuming it is on track for $1B annual revenue in 2014.
Weibo had 503 million registered users in 2012, who produced 100 million messages per day, and is estimated to have 54 million active users as of June this year. The number of registered users can be misleading due to shell accounts, but based on the number of active Weibo users and the number of messages per day, I estimate Weibo to be about 1/4 the value of Twitter at present, which is consistent with Alibaba's valuation of Weibo at $3.27B.
We're ready to make an optimistic estimate of Sina's market cap. If Sina minus Weibo's revenue has been growing at 11.7% per year since the end of 2007, then we can estimate the market cap of Sina minus Weibo to be $2.44B(1.117)^5=$4.24B. If Twitter's IPO valuation is $16B, and Weibo is worth about 1/4 of Twitter, then Weibo should be worth $4B. Overall, Sina's market cap would then be $8.24B, or 54% higher than its current market cap of $5.35B.
A less optimistic estimate might be as follows: Assume that the market cap of Sina minus Weibo only grew about 5% per year from 2007, which brings it from $2.44B to $3.11B. Add Alibaba's estimate of $3.26B for Weibo, and you have a $6.36B market cap, or 19% upside.
Either way, there seems to be a reasonable margin of safety. Some pertinent risks to investing in Sina is the validity of the Twitter/Weibo comparison, the risk that Weibo does not achieve the same success as Twitter due to competition (eg, WeChat from TenCent) or political reasons (China is much less tolerant of free speech than the US), and that Sina may not be reporting its finances as accurately or truthfully as an American company. However, since the time horizon for this trade is only up until the date of Twitter's IPO, these risks are somewhat mitigated.