Weibo is China's microblogging service that has been described as Twitter (TWTR) -like, with a little Facebook (FB). According to Weibo's F-1, it ended 2013 with 129.1 million monthly active users, or MAUs, which represented growth of 33% over 2012.
Sina has traded lower despite Weibo's anticipated IPO, and many investors wonder why and whether the stock could go lower. It certainly could.
Weibo's revenue grew 190% last year to $188 million, and now Sina, which owns a 78% pre-IPO stake, is leading a $500 million IPO that'll put Weibo's valuation north of $5 billion. In regards to Sina, this move makes sense, as the demand for users, not necessarily revenue, is quite high following Facebook's $19 billion acquisition of WhatsApp.
But, here's the problem: Valuation multiples for social media-like companies are now seeing a drop. Twitter has seen its valuation fall 24% this year. At its peak, Twitter traded at more than 65 times sales. Today, it trades at 41 times trailing 12-month sales, according to Yahoo! Finance.
Facebook, trading at nearly 21 times sales, has also seen a double-digit percentage decline from a steeper 24-times multiple (peak price/sales). Other big-momentum tech companies like LinkedIn and Yelp have also seen double-digit valuation declines as of late. And for Sina and Weibo, this could be bad news.
Currently, with a $5 billion implied market capitalization, Weibo would be trading at 26 times sales. Granted, Weibo does have 100%-plus annual growth, but the problem is with social media and momentum tech seeing some multiples decline, as evident with the likes of Facebook and Twitter, the market may not be willing to pay a huge premium for Weibo, which consequently explains why Sina has fallen lower.
For investors interested in Sina, the company could still earn nearly $4 billion in cash before taxes and fees before taxes and fees -- 78% of $5 billion is $3.9 billion -- from the Weibo IPO. But by earning this cash, Sina is giving up its growth engine, and will be left with its remaining business growing at a single-digit pace.
This lack of growth is important for investors, as it completely changes Sina as a company.
In its last quarter, Sina saw revenue grow 43% to $192.3 million. However, $71.4 million came from Weibo, in which its two divisions, ad revenue and non-ad revenue, grew at a 163% and 114% clip, respectively. Clearly, this shows that the majority of Sina's growth comes from Weibo, and that year-over-year gains won't be nearly as aggressive without Weibo.
Albeit, Sina can buy growth elsewhere, but for the sake of its immediate stock performance, and to truly capitalize on the demand of Weibo, investors need to hope that this space shows some recovery, or stabilization. If not, it could be significantly lower days for Sina ahead.
At the time of publication, the author was long SINA, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.