Sina (SINA) reported strong Q2 results in which investors saw encouraging signs of Weibo monetization (10% of ad revenue). In addition, robust online video revenue growth (+126% y/y) allowed Sina to achieve net revenue growth that beat the consensus estimate.
Weibo monetization is critical to Sina's growth because it gives the company a chance to capitalize on its 360+ million users. As Sina continues to refine its social interest graph and targeted ad systems, Weibo will likely become a significant contributor to Sina's total ad revenue (~30% within the next two years). In addition, the platform's popularity among online users sets Sina apart from rivals such as Sohu (SOHU), NetEase (NTES), and Tencent, which all operate their own microblogs, and Baidu (BIDU), which shut down its own microblog after failing to compete against Weibo.
However, despite the initial sign of Weibo monetization, investors need to consider the factors that could cause minor headwinds in Sina's growth, namely:
- The soft macro environment in China
- Weibo's current time-based display ad system
- Cannibalization of the portal business
The soft macro environment in China will continue to challenge ad spending. While ad spending in Q3 could be resilient due to the London Olympics, the macroeconomic indicators (eg, PMI, industrial production, retail sales) continue to deteriorate and weak ad spending could resurface in Q4.
Despite the positive feedback from advertisers on Weibo's social interest graph, investors should note that Weibo's ad delivery technology is still time-based rather than performance-based, which does not differentiate the platform from its traditional web portal. To truly bring the Weibo platform to the level that is comparable to its western counterparts such as Twitter and Facebook (FB), Sina needs to continue investing in R&D, which could further delay the platform's profitability for several quarters. I note that management has increased Weibo investment to $160 million, +40% from the prior level.
Finally, the 12% y/y online ad revenue growth indicates that the strong growth from Weibo and online video was able to offset the weak growth or a possible decline in the portal business. As advertisers gradually transition to Weibo from Sina's traditional web portal, unsold ad inventories in the portal could rise and pricing could come under pressure. One way to mitigate this issue would be for Sina to package Weibo and portal ad inventory together and charge the advertisers a higher price so that both Weibo and portal inventory can be utilized.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.