Weibo: Look Beyond The Third Quarter

Summary

• It was a mixed quarter for Weibo in Q3 2022, as the company's better-than-expected operating margins were negated by a significant revenue contraction.
• Investors are looking beyond Q3 and they have their eyes on WB's Q4 performance; I expect Weibo to achieve a higher operating margin and a narrower revenue decline for Q4.
• I have a Buy rating for WB; there is the potential for Weibo's P/E multiple to expand as its financial performance improves over time.
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Elevator Pitch

I rate Weibo Corporation's (NASDAQ:WB) [9898:HK] stock as a Buy.

I analyzed WB's financial performance for the second quarter of this year with my prior September 2, 2022 write-up. In the current article, my focus is on the review of Weibo's most recent Q3 2022 financial results, the company's outlook, and the stock's valuations.

Weibo delivered a mixed performance in the most recent quarter. But if one looks beyond the third quarter, WB's Q4 2022 results should be good judging by management's comments. WB trades at a single-digit forward P/E multiple now, and I see its shares as being undervalued. As such, I raise my rating on WB from a Hold to a Buy.

Weibo's Third Quarter Top Line Was Below Expectations

Revenue for Weibo decreased by -25.3% YoY to $454 million in the third quarter of 2022, as highlighted in the company's most recent quarterly earnings press release. More significantly, WB's Q3 2022 top line came in -3.8% below the analysts' consensus estimate of $472 million.

Also, Weibo's key operating metrics for the recent quarter weren't particularly impressive. Monthly active users and average daily active users for the company expanded marginally by +0.3% QoQ and +0.4% QoQ to 584 million and 253 million, respectively for September this year.

At the company's Q3 2022 earnings call, WB acknowledged that its "clients remain cautious towards their advertising budget spend", and that has negatively impacted its "monetization" and revenue in the recent quarter.

But WB's Operating Profitability Was Better Than What Analysts Had Anticipated

WB still managed to achieve above-expectations profit margins for the third quarter of the current year, even though its top line performance was disappointing as discussed in the preceding section.

GAAP gross profit margin for Weibo improved by +0.4 percentage points QoQ from 78.8% in Q2 2022 to 79.2% for Q3 2022. WB's actual third quarter gross margin turned out to be approximately +0.7 percentage points better than the sell-side's consensus forecast of 78.5% as per S&P Capital IQ data.

Similarly, WB registered a non-GAAP adjusted operating profit margin of 35.7% for the third quarter of 2022, and this was around +510 basis points higher than the market's consensus projection of 30.6%.

Weibo highlighted at its recent third quarter results briefing that it had implemented "stringent cost control measures" such as "disciplined channel investments." The company's focus on expense optimization has clearly paid off in the form of better-than-expected operating profitability.

Market Had A Positive Response To Weibo's Q3 2022 Results

It is reasonably fair to label Weibo's most recent quarterly financial performance as a mixed quarter. On the positive side of things, WB's gross and operating profit margins exceeded the market's expectations. On the negative side of things, Weibo's revenue fell short of the consensus forecast, and the company's bottom line (or non-GAAP EPS) came in -4.5% below expectations.

Nevertheless, investors responded well to WB's most recent quarterly earnings announcement. Weibo's share price rose by +7.4% to close at $15.90 at the end of the November 17, 2022 trading day after the company announced its Q3 2022 results on the same day prior to the market's open. This isn't surprising, as investors are looking beyond the third quarter and focusing their attention on the expected improvement in WB's near-term financial performance. In the subsequent section, I touch on Weibo's financial outlook in the short term.

Positive Q4 2022 Outlook For WB

Weibo didn't provide specific quantitative guidance, but the company's management comments at its most recent quarterly earnings briefing suggest that WB's prospects in the short term are decent.

With respect to the top line, WB revealed that "budgets from e-commerce platforms returned to a growth trajectory" for this year's "Double 11 shopping festival" in November vis-a-vis 2021. Separately, Weibo also noted that the 2022 (soccer) World Cup and new smartphone product launches (most companies introduce their flagship products to coincide with the festive season) are expected to be supportive of its top line performance in Q4 2022.

In terms of profitability, Weibo stressed at its Q3 investor call that it will continue to do "more work on the optimization of our costs" with the aim to "improve our operational efficiency further." Specifically, WB noted that its fourth quarter operating margin should be on par with that of Q2 2022, but lower than Q3 2022 due to the resumption of certain offline events (with slightly lower returns as compared to online activities).

As such, I expect WB to deliver a positive QoQ revenue growth for Q4 2022, with its top line contraction on a YoY basis narrowing (versus -25.3% for Q3) in the fourth quarter. Separately, I also see Weibo recording a YoY expansion in its operating profit margin for the fourth quarter. As per management's comments, assuming that WB reports an operating profit margin of 32% for Q4 2022 (same as that of Q2 2022 as per management comments), this will be +2 percentage points higher than the company's 30% operating margin for Q4 2021.

Potential For Valuation Re-rating

The market currently values Weibo at an undemanding consensus forward next twelve months' normalized P/E multiple of 6.9 times according to valuation data sourced from S&P Capital IQ. In the prior section, I highlighted expectations of an improvement in WB's financial performance for Q4 2022. I also think that Weibo can generate positive bottom line growth in the teens next year, as China pivots away from its COVID-zero policy and the Chinese economy recovers. As such, there is the potential for Weibo's P/E multiple to expand as the company achieves earnings expansion again starting in 2023.

Concluding Thoughts

I upgrade my rating on WB's shares from a Hold to a Buy. Weibo's near-term business outlook is reasonably good, and this should drive a re-rating of its valuations in time to come.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.