Chinese internet stocks were all the rage several years ago
and that enthusiasm made sense given the population of the
world's largest country was increasingly moving into the middle
class and getting online. The potential for a Chinese company or
two to become the new Google (
) or Amazon (
), only several times larger seemed to be close at hand. If a
company could penetrate the Chinese market at the levels achieved
by American internet giants, users could be measured in billions
instead of millions, and revenue and earnings numbers would then
also be orders of magnitude larger.
But then the reality of doing business in China set in. First,
the country's economy has slowed. Due to what I'll call the
opacity of Chinese economic data, it is hard to tell how much the
economy has slowed, but since a government that seems determined
to paint the rosiest picture possible is admitting that things
are slowing down, the real picture is assumed to be even
Economic fluctuations are something that investors should be used
to. Other issues with doing business in China have also emerged
recently. Take for example Sina.com (
) which reported earnings last week. The company lost its
licenses for video and internet publishing after the government
accused it of having pornographic content. I haven't seen the
content in question, but stories about the
capriciousness of Chinese censors
aren't too difficult to find.
For its part, Sina says it is working with regulators to get
its licenses back and it is still offering some content. That
apparently hasn't stopped advertisers from pulling away from the
company. Unfortunately for Sina, even if it does get its licenses
back, a site hosting user-generated content could easily run
afoul of regulators again through no fault of its own.
In terms of actual earnings, Sina lost 52 cents per share, or
earned 15 cents per share on an adjusted basis. Analysts had
expected the company to earn 16 cents per share. Revenue was
Sina recently sold part of its Twitter-like Weibo (
) microblogging service in an IPO. The IPO raised less than
expected and resulted in the company taking a $40 million
non-cash charge in the quarter. Weibo is regrouping quickly, but
the company is spending a lot of money to attract those new users
in hopes of staying ahead of competitors.
Sina's CEO, Charles Chao said that in addition to continued
high spending at Weibo, Sina needs to invest in its portal site,
which it has neglected recently as it tried to build out the
That spending, plus a disappointing revenue outlook for both
Sina and Weibo likely mean that Sina could continue losing money.
The technology sector is full of companies that lost money for
years before turning things around. That could end up being true
in Sina's case as well, but all those American internet companies
didn't have government censors to deal with.
Traders looking for a quick play on Sina could consider a June
50/52.50 bear-call credit spread. This position yields a 20-cent
credit, which is an 8.7% return, or 122.07% on an annualized
basis (for comparison purposes only. This trade will make a full
profit so long as the stock is below $50 at June expiration,
giving it 15.2% downside protection.