- Much of Q2's strength was due to Weibo as portal business continue to see growth stagnation.
- Investment in the portal could pressure margin in the near-term.
- Weibo will drive near-term growth in Sina but long-term fundamental continue to be shaky.
Sina's (NASDAQ:SINA) 2Q14 indicated that the portal business continues to suffering from growth deceleration and that the company can only rely on Weibo (NASDAQ:WB) as its near-term driver. Portal advertising revenue of $96.2m (+6% y/y) saw sequential erosion vs. Q1 (+11% y/y) due to what appears to be the shift of ad dollars towards those platforms that have greater scale and web traffic. Overall revenue of $187m (+19% y/y) was primarily driven by WB, which saw revenue more than doubling on a lower base.
In my view, Sina's Q2 result is not particularly strong in that the portal business is facing revenue stagnation while WB is suffering from a deteriorating engagement base. Unless Sina ramps up on its portal business and focus on niche portals to rejuvenate revenue growth, I do not expect to see a near-term recovery in the portal business. That leaves Sina to be highly dependent on WB's success, which is also questionable given WB's diminishing relevance as competition from Tencent's Wechat heats up. Reiterate my bearish view and recommend investors to underweight Sina and WB.
Stagnating portal business
Portal advertising revenue decelerated sharply from Q1, growing only 6% y/y to $96m. I suspect that the loss of online video and publishing license from Q1 was the culprit behind the deceleration. Despite only accounting for a small portion of Sina's overall revenue, the loss of publishing and video license had a bigger impact on advertiser sentiments, which prompted advertisers to shift their budget towards more steady and reliable platforms (ie. Baidu, Youku). Clearly, advertiser's confidence have been shaken since the government crackdown and it will take some time to restore such confidence so investors should not expect a near-term recovery of the portal business. That said, revenue stagnation is here to stay and we could see flat y/y growth of the portal business in Q3 in that it is evident that the first half of the World Cup was not sufficient to give Sina a revenue boost this quarter.
In order to put itself back on the growth path, Sina needs to invest in popular online verticals to avoid becoming the next Sohu (NASDAQ:SOHU). Management has highlighted that it intends to invest heavily to bring the portal business back. As such, investors can invest heavy investments and margin pressure ahead.
All eggs in the Weibo basket
Much of the topline driver was due to WB, with revenue more than doubling this quarter on a lower base. In the near-term, Sina's growth will be heavily dependent on WB until the portal business begin to see revenue acceleration. As such, much of the analysts' attention will be focused on WB when looking valuing or gauging the prospect of Sina.
I believe Sina's low double-digit growth is sustainable is achievable in the near-term thanks to WB and its lower y/y comp, but I do not expect this trend to sustain for more than 3 quarters when WB's y/y comp begins to get tougher in 1H15. This means that Sina's overall growth profile could see sharp deceleration. The potential of regulatory risk, coupled with a diminishing WB engagement profile, could further shatter advertiser sentiments, in my view.
In conclusion, Sina's headline Q2 was mainly driven by the near-term strength in WB but long-term fundamental looks shaky. I reiterate my bearish view on the stock and advise investors to look into Autohome (NYSE:ATHM) for the online vertical play.
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