Tuesday, March 29, 2011
Monday, March 28, 2011
Sina SINA-Q would be an attractive buy-out candidate.
In 18 months, it has created from scratch a Twitter-like service called Sina Weibo that – as of last month – surpassed 100 million users. That's something that took Twitter twice the amount of time.
To call Weibo a Twitter clone does it a disservice. It's actually much more functional than Twitter with a superior Apple iPhone application, commenting and forwarding system, along with instant messaging and location-based services. It is more of a combination of Twitter and Facebook that a pure copycat of Twitter.
Since the start of last July, Sina's stock is up 146 per cent, and its market capitalization stands at more than $5-billion (U.S.). Remember that it was worth $2-billion when it was just known for its traditional advertising-supported portal business (which has also been on fire since last summer – just ask its competitors Sohu SOHU-Q and NetEase.com NTES-Q. Sina also has almost $1-billion in cash.
Keep in mind that, since July 1, Sohu's stock has increased almost 100 per cent on its own – just on its ad-supported business. Although it has a Twitter-like microblogging service, it is far less popular than Sina's.
Therefore, even though Sina has seen its stock price soar since July, it is reasonable to argue that the “extra” value created in market capitalization for Sina relative to Sohu directly attributable to Weibo is only an extra $1.1-billion.
Yet, Weibo is a powerful platform to drive future growth for the company. We all understand this intuitively when we think about Facebook and Twitter. Twitter was recently valued in a secondary market stock sale (which has surprisingly turned out to be very accurate indicators of actual values later awarded by private sophisticated investors) at $7.7-billion. Yet, Twitter's revenues were reportedly only $45-million last year . Twitter is supposed to have 160 million users at the moment. Sina Weibo might surpass them in users by September.
Facebook was recently valued by General Atlantic Partners at $65-billion. Its revenues were $1.2-billion to $2-billion in 2010. Facebook now has 500 million users worldwide.
Sina Weibo hasn't started monetizing itself yet. The user experience is now free of ads for the most part. During last week's earnings call, CEO Charles Chao said that they didn't expect to start monetizing the service until the second half of 2011 and, even then, he said they wouldn't do much.
His strategy for building the platform first and monetizing later is completely out of the same playbook that Facebook and Twitter have followed, which has directly led to their current sky-high valuations.
Yet, some of the Sina analysts seem to be clueless about why such a strategy makes sense. Goldman Sachs' Hong Kong-based analysts downgraded Sina prior to last week's earnings call and put an $85 target on the stock. They said the stock had gotten ahead of itself based on its recent run-up.
Yet, it was the New York-based private banking arm of Goldman that recently valued Facebook at $50-billion and had to turn away its own clients who wanted to invest more than $2-billion of their own money into the social networking company – despite the modest revenue – because of how valuable they believe that platform to be in the future. I guess the Hong Kong analysts weren't CC'ed on that internal firm memo.
I don't get the logic that sees Weibo is overvalued because it added $1-billion to Sina's market capitalization, given the speed with which it has grown in China.
You can look within China to see that the most valuable Internet company, Tencent, which is only listed in Hong Kong (or on the US pink sheets as ticker TCEHY), followed the same strategy as Sina. Tencent rode the popularity of its instant messaging service QQ to a market capitalization north of $50-billion, bigger than Baidu BIDU-Q.
Sina Weibo is attracting a more urban, more affluent user than Tencent's QQ. However, Weibo is certainly the shiny new thing in the Chinese Internet world compared to QQ. It is unquestionably a threat competitively over the next three to five years, although Tencent has its own microblogging service.
So, if you were Tencent with a $50-billion market capitalization, why wouldn't you be looking at Sina as a potential acquisition target to remove that competitive threat. Even if you had to pay $10-billion for the company, it would protect your competitive lead and you would be able to ride the growth of Weibo in the coming years instead of Sina.
But if Tencent is thinking along those lines, so should Baidu and Alibaba (which is 40 per cent owned by Yahoo YHOO-Q. They would each rather have Weibo rather than Tencent. There have been rumours for the last few months that Sina will spin off Weibo as a separate company soon. If and when it does, both Baidu and Alibaba have been mentioned as possible $100-million investors each into that new business. They obviously see a value in the business and would rather they be closer to it than Tencent.
Sina's CEO has already talked about how he wants to link Weibo updates to search results this year, which would play into Baidu's strength. Alibaba could use the Weibo platform eventually both to advertise specific deals from Taobao.com as well link in its Alipay transaction service. Remember than Tenpay is Tencent's competitive offering to Alipay, which currently is No. 2 in market share for payments in China behind Alipay.
We haven't even mentioned the U.S. Internet companies yet. Of course, Facebook's Mark Zuckerberg flew to Beijing in December to meet with Charles Chao. But any other American Internet company including GoogleGOOG-Q, eBay EBAY-Q, Amazon AMZN-Q or even Yahoo would be attracted to the idea of investing in Weibo's future. It's hard to see one of the Americans being allowed to purchase the company outright but an investment would work.
This brings us to what is somewhat unique about Sina in the Chinese Internet world. Unlike Tencent, Baidu, or Shanda Interactive, Sina is not led by one dominant founder CEO who still controls a chunk of the company himself.
Sina used to actually be based in Sunnyvale, CA, back in the dot-com days and has gone through countless financings. The original founders have long since left the company. Charles Chao, the current CEO (who I think is doing all the right things in growing out the business) reportedly only owns less than 2 per cent of the company .
What that means is that Sina is more vulnerable to a takeover than one of the companies with a founder CEO. Obviously Chao sees the long-term opportunity with Weibo is to grow Sina to be just as big if not bigger than Tencent. That would be 10 times the current size. He would like to see his stake grow by that much too.
Yet, if a large offer was made for his company today, his vote would not really matter. It would be something that could be presented to the shareholders for a vote. They might decide that $10-billion now is better than the chance at becoming a $50-billion company in three years.
I continue to believe that Sina is woefully undervalued given the rapid growth of Weibo in 2010. Its platform is worth much more than the implied $1-billion in Sina's stock today.
Eric Jackson is a senior contributor to TheStreet.com. He is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.