3 Simple Reasons Why I Won't Buy Weibo Corporation Stock

The international version of Weibo's app.

Shares of Chinese social network Weibo (NASDAQ: WB) surged 160% this year fueled by a streak of big earnings beats. Its revenue soared 72% annually to $253 million last quarter, marking its highest growth rate in three years. Its monthly active users (MAUs) jumped 28% annually to 361 million, eclipsing Twitter 's MAU base of 328 million.

On the bottom line, Weibo's non-GAAP net income surged 254% to $57.8 million, its GAAP net income jumped 561% to $46.9 million, and its adjusted EBITDA rose 272% to $70.5 million. Analysts expect its revenue and non-GAAP earnings to respectively rise 66% and 99% this year.

The international version of Weibo's app.

The international version of Weibo's app. Source: Google Play.

Those figures indicate that Weibo is firing on all cylinders -- but I'm not interested in buying the stock at current prices. I previously sold my shares of Weibo on the way up, because I believe three major headwinds could easily derail the stock.

1. Weibo's nosebleed valuations

The biggest problem with Weibo is its valuation. The stock trades at 120 times earnings, versus the industry average of 37 for internet information providers. Its price-to-sales ratio of 28 is also much higher than the industry average of 6.

The bulls will likely argue that Weibo deserves that premium, but SINA (NASDAQ: SINA) actually represents a smarter way to invest in Weibo. SINA spun off Weibo as a public company in 2014, but still owns 46% of the company with a 72% voting stake .

SINA's Weibo-related gains are slightly offset by the slower growth of its older portal business, but Wall Street still expects SINA's revenue and non-GAAP earnings to respectively rise 46% and 99% this year. Yet SINA trades at just 35 times earnings with a P/S ratio of 7 -- making it the cheaper and safer way to profit from Weibo's growth.

2. The government's ongoing crackdown on social media

Back in June, Chinese regulators ordered Weibo to stop streaming audio and video content, claiming that the company hadn't acquired a newly introduced broadcasting license. Other live streaming video providers like Tencent (NASDAQOTH: TCEHY) and Momo had already obtained the license.

A robot holding a Chinese flag.

Source: Getty Images.

That's why Weibo stated that it expects its live video revenue to account for "a very small portion" of its revenues for the third quarter. Weibo's top line growth indicates that live videos aren't a major growth driver, but this isn't the first time the government cracked down on Weibo.

The government regularly asks Weibo to censor search terms on "sensitive" topics like Taiwan, Tiananmen Square, and Tibet, and a recent probe accuses Weibo, Tencent's WeChat, and Baidu of spreading rumors, pornography, and terror-related content. As seen in the government-mandated removal of Baidu's "misleading" healthcare-related ads last year, new regulations can easily bring Weibo's growth to a screeching halt.

3. It's still no match for Tencent

Weibo is often called the "Twitter of China". Like Twitter, Weibo carved out a defensible niche with celebrity users, who tether hundreds of millions of followers to its ecosystem. To keep users engaged, Weibo is also providing streaming videos from big content providers like the NBA.

But Tencent is still considered the " Facebook of China" since it dominates the social media industry with 963 million MAUs on its mobile messaging app WeChat, 850 million MAUs on its PC-based messaging platform QQ, and another 606 million MAUs across its Qzone social network.

WeChat's mobile app.

WeChat's mobile app. Source: iTunes.

WeChat, like Facebook, is the go-to app for social interactions with other users. Tencent is also expanding WeChat as a platform -- which offers mobile payments, videos, ride hailing services, delivery services, and other services -- from a single "super app". This clearly threatens smaller social media players like Weibo, which could struggle to grow out of its niche.

Should you avoid Weibo, too?

I'm not saying that Weibo is a bad long-term investment. I personally bought shares of SINA after I sold my Weibo shares, since I still wanted to profit from the latter's growth.

But Weibo is still very risky as a stand-alone investment, and investors should understand its valuations, the persistent threat of censorship, and the growth of WeChat before buying this speculative stock.

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Leo Sun owns shares of Tencent, Baidu, and Sina. The Motley Fool owns shares of and recommends Baidu, Facebook, and Twitter. The Motley Fool recommends Momo, Sina, and Weibo. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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