Sina's Earnings Pop Provides Short Opportunity

 |  About: Sina Corporation (SINA), Includes: BIDU, RENN, SOHU, YOKU
by: Bill Maurer

Shares of Chinese online media firm Sina Corp (NASDAQ:SINA) rose sharply on Wednesday after its quarterly earnings report, which was mixed. The net loss the company posted was not as big as expected, but revenues came in a little light, and revenue guidance for the next quarter was light as well. Sina shares popped because the company stated it is closer to getting advertisements up on Weibo, its microblogging service. Shares had been so down lately that this kind of pop seemed almost inevitable to me. However, I was not impressed with the results. I'll discuss the quarter first, and then I'll present my argument as to why this is a potential short candidate.

Q1 Results:

Sina reported net revenues up 6% to $106.2 million. However, its non-GAAP revenues, which the company provides guidance for, and analysts target their estimates at, came in at $101.5 million. This was at the low end of the company's provided guidance range of $101 to $104 million, and below street estimates for $102.56 million. Advertising revenues were up 9% over the prior year period, but non advertising revenues were flat. The company posted a net loss of $0.21, which beat estimates by two cents.

The following table shows Sina's headline revenue numbers, along with the cost of those revenues, and the resulting gross margins. These are the actually reported numbers. Sina provides a number of reconciliations to non-GAAP and GAAP numbers, which can complicate analyzing the results from period to period. For simplicity, I have provided the reported numbers, with links to each quarter's results in the first line of the table, for those that wish to see all of the details.

Revenues Q1 2009 Q1 2010 Q1 2011 Q1 2012
Advertising $43,171 $54,279 $72,345 $78,542
Non-Advertising $30,594 $30,722 $27,866 $27,678
Total $73,765 $85,001 $100,211 $106,220
Costs Of Q1 2009 Q1 2010 Q1 2011 Q1 2012
Advertising $21,637 $24,002 $33,088 $44,084
Non-Advertising $13,495 $12,869 $13,763 $13,027
Total $35,132 $36,871 $46,851 $57,111
Gross Margin Q1 2009 Q1 2010 Q1 2011 Q1 2012
Advertising $21,534 $30,277 $39,257 $34,458
Non-Advertising $17,099 $17,853 $14,103 $14,651
Total $38,633 $48,130 $53,360 $49,109
Click to enlarge

As you can see from the table, non-advertising revenues have declined over the past couple of years. Also, the costs of advertising revenues have significantly risen, which has pressured gross margins. I'll cover those more in detail in the next section.

Short Case 1 - Declining Margins & Earnings:

As I mentioned above, Sina's gross profit declined year over year, despite a rise in total revenues. Also, the company saw a dramatic increase in operating expenses, as it continues to pour millions into Weibo, which the company hopes will start to pay off sometime later this year. Wednesday morning, I heard a few analysts give the company a pass on the increased expenses, because of the potential for future gains. However, this isn't the first quarter where Sina's operating expenses rose. In last year's period, Sina poured a ton of money into Weibo, and the company said it expects even more investment in Q2, which could produce another net loss. The following table shows just how quickly Sina's operating expenses have risen in recent year.

Expenses Q1 2009 Q1 2010 Q1 2011 Q1 2012
Sales/Marketing $15,829 $17,050 $25,718 $34,744
Product Develop $7,479 $7,685 $10,263 $25,023
General/Admin $6,193 $6,206 $5,596 $7,321
Amortization $411 $2,600 $258 $108
Total Op Exp $29,912 $33,541 $41,835 $67,196
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So not only are gross margins coming down, they are down 10 full percentage points in the past two years, as seen from the following table. Operating margins have gone from a positive 17% to a negative 17%. Net profit margins have declined even more.

Q1 Margins Q1 2009 Q1 2010 Q1 2011 Q1 2012
Gross 52.37% 56.62% 53.25% 46.23%
Operating 11.82% 17.16% 11.50% -17.03%
Net Profit 13.22% 28.65% 14.98% -12.94%
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This isn't just a first quarter trend. Sina has had trouble keeping costs in check over the past couple of years. Despite revenues rising at a decent clip, earnings per share just aren't, which has led to a lofty valuation (more on that later). Just look at the following table. Revenues have risen nicely since 2009, but this will be the second straight year that earnings per share will drop. Despite a forecast for earnings to rocket higher in 2013, they still will be below the 2010 period. To me, Sina reminds me a lot of Amazon (NASDAQ:AMZN) in the US. Revenues are rising, but the bottom line just isn't.

Growth? 2009 2010 2011 2012* 2013*
Revenues ($M) $382.20 $383.60 $464.08 $545.30 $682.73
EPS $1.18 $1.73 $0.92 $0.43 $1.47
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Short Case 2 - Valuation and Comparisons:

To me, there are a few names I like to look at when I analyze Sina. All of them are Chinese internet companies. Sina is an online media and advertisement company, and the closest match to Sina is (NASDAQ:SOHU), which also provides online media services, as well as a few other things. Sina's Weibo is considered the Chinese version of Twitter. We also have Youku (NYSE:YOKU), which is considered the YouTube of China, providing an online television platform. Another comparable is Renren (NYSE:RENN), which is considered the Facebook (NASDAQ:FB) of China, a social networking site. Of course, we also have Baidu (NASDAQ:BIDU), the Chinese internet search giant, which is comparable to Google (NASDAQ:GOOG).

When it comes to currently expected revenue growth, Sina is near the bottom of the five, along with its closest match, Sohu. As you can see from the below table, Sina is expected to show the least amount of revenue growth in 2012. Three of the other four are growing much faster. Sina is expected to show more revenue growth in 2013, but that also assumes it can get some help from Weibo. As we have heard recently, there has been a very low click through rate for Facebook advertisements, so I'm not convinced Weibo will help that much, not yet anyway.

2012 17.5% 57.6% 21.4% 96.7% 51.4%
2013 25.2% 41.7% 18.5% 67.7% 43.4%
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When it comes to earnings per share growth, Sina isn't doing that great either, as you can see from the following table. Sina is expected to show the worst EPS decline in 2012, even worse than the decline from Sohu. Now, we know that Sina is expected to show an earnings rebound next year, but that assumes they can keep costs under control. They have not been able to prove that they can in the past couple of years. Also, if you remember, I noted above that even with the rebound next year, Sina's EPS are still expected to be well below those from 2010. Sohu is expected to have 2013 earnings per share ahead of 2010 numbers.

2012 -53.26% 56.80% -40.18% N/A N/A
2013 241.86% 39.26% 46.27% N/A N/A
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*Youku posted a 32 cent loss in 2011, and is expected to show a 25 cent loss in 2012 and a 10 cent profit in 2013. Renren posted a three cent loss in 2011, and is expected to post a 10 cent loss in 2012 and a three cent loss in 2013.

So what does all of this mean in terms of valuation? Well, to me, it means that Sina is overvalued currently. The following table shows the price to sales and price to earnings multiples for each of the five names, based on the market cap as of Wednesday's close, and the currently expected revenues and earnings for 2012 and 2013. I've excluded the P/E multiples where a loss is expected.

P/S 2012 6.97 12.06 1.63 9.62 13.60
P/S 2013 5.57 8.52 1.37 5.74 9.49
P/E 2012 133.51 26.52 16.47 N/A N/A
P/E 2013 39.05 19.04 11.26 235.30 N/A
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Again, the closest comparable to Sina is Sohu, and the comparisons don't look very good. Sina appears extremely overpriced. When it comes to the other three names, Sina has a lower price to sales, but remember, Sina offers a lot less revenue growth, so the premium on price to sales does make sense. To me, Sina just does not justify the current price, not at this point anyway. I need to see Weibo contribute, and until it does, the valuation looks extremely awful.

Conclusion - A Short Opportunity Does Exist:

Sina has seen first quarter margins decline tremendously two years in a row, and they said the second quarter may not be any better. In fact, non-GAAP revenue guidance was a range of $126 to $129 million, and that was below street estimates of $130.44 million as well. The company has seen costs skyrocket two years in a row, sending earnings per share lower and lower. That has sent the valuation sky high, with the company currently trading at about 133 times this year's expected earnings. Even 39 times next year's expected earnings seems expensive, especially when you compare it to others in the space.

So here is my thinking on the short opportunity. In January, Sina was trading in the low $60s. Information came out about the Facebook IPO, and Sina, as well as almost all other internet and social media names, rallied hard. Sina jumped about $15 in a week, to a high of nearly $78. Then they cooled down again, as you can see from the chart below. They rose again after Q4 earnings in late February, but that rally faded as well.

This Friday, Facebook will start trading, and I think that Sina and others will trade higher as a result. Sina shares rose 11% Wednesday on the earnings news, but fell off the day's high of nearly $60. I wouldn't be surprised if the stock continued to rally from here for the next few days, partially thanks to the Facebook IPO. However, I don't think it can sustain the move, and I would be looking to short it if we go higher. I don't have a concrete price to recommend getting in at, but I think the $60 to $65 range is a good start, and definitely short it above that range.

(Source: Yahoo! Finance)

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SINA over the next 72 hours.