Sina: $7B Can Buy a Lot
There has been a lot of speculation surrounding Sina (NASDAQ:SINA) in the last month, mostly around its asset Weibo and its upcoming initial public offering. The biggest questions revolve around the valuation of Weibo and how Sina will perform without Weibo. However, despite Sina’s 28 percent loss in 2014, recent analysis and a recovering social media market might imply that Sina will trade higher.
On Monday, Pacific Crest upgraded shares of Sina to Outperform from Perform, with an $88 price target. The analyst said in a note, “with a significant portion of SINA’s value locked in Weibo, we had been hesitant to be more positive on the name.” He added, “Now, with our increased clarity on SINA’s asset composition, increasing asset liquidity, and decreased reliance on Weibo valuation, we see an extremely positive risk/reward profile for SINA.”
In many ways, Pacific Crest’s outlook for Sina is shared by many, which can be summarized as uncertainty. In a recent article, I said that Sina could trade lower due to the continued declines in social media stocks like Facebook, Twitter, and LinkedIn, which consequently could decrease the demand for Weibo’s IPO. However, Chinese online stocks in particular have begun to recover, and some firms like JG Capital see a $6.5 billion valuation for Weibo.
With a 78 percent pre-IPO stake, Sina could earn more than $5 billion following the IPO, which will add to its already-large cash position of nearly $2 billion. And with Weibo announcing its plans to list on the Nasdaq, as well as adding Morgan Stanley and Piper Jaffray to its list of underwriters, including Goldman Sachs and Credit Suisse, this IPO is now becoming a reality, one that could be very lucrative for Sina.
With that said, Weibo is in fact the growth of Sina. Weibo’s revenue grew 190 percent last year to $188 million, making it a large chunk of Sina’s $665 million in revenue and 26 percent growth. In fact, once Weibo is eliminated from the equation, it’s possible that Sina will have no growth, or possibly even negative year-over-year performance.
The good news is that Sina has a $4 billion market cap, meaning the IPO of Weibo combined with its current cash position will give it far more cash than the company’s current valuation. With that cash, Sina will be able to pay dividends, buyback stock, or my personal favorite, acquire growth.
So, what will $7 billion buy? Perhaps it wants to buy another online Chinese media company like Sohu (NASDAQ:SOHU), a firm with 25 percent growth that is highly profitable. Or the even more profitable gaming company Changyou.com (NASDAQ:CYOU) — growth of 10 percent that may not be the most attractive, but operating margins of 42 percent is quite appealing.
For those wanting the company to maintain its aggressive growth streak, maybe it snatches up the social media playform YY (NASDAQ:YY), a YouTube of sorts, and a company that’s growing at more than 100 percent annually with operating margins of 26 percent. In fact, with $7 billion in cash, Sina could acquire YY and Changyou — it may have to raise a little debt — therefore giving it a leading game and video-content provider to incorporate with its media presence.
The point is that $7 billion is a lot of cash, and it’s looking as though fears of an underperforming Weibo IPO are overblown, and somewhat senseless. Hence, Sina may not be the same growth company without Weibo, but with $7 billion, it can buy another — or two — companies with Weibo-like growth, which should create upside value.
Disclaimer: Brian Nichols owns shares of Sina.