This China-Based Hybrid of Facebook and Twitter Is Set to Soar in 2016

While bigger Chinese social media stocks steal the spotlight this week, investors are ignoring one of the biggest plays right now on the country's rising, Internet-savvy middle class.
By John Persinos ,

This week, the China-based online and mobile commerce giant Alibaba Group cemented its $3.9 billion acquisition of Chinese video site Youku Tudou. Alibaba already owns 18% of Youku, often referred to as the YouTube of China.

But as this mammoth deal hogged the financial headlines, a lesser-known play on China's Internet frenzy has escaped noticed: Sina (SINA) - Get Report . Here's why you should buy this stock now, to profit from a newly affluent and tech-savvy middle class in the world's most populous country. Based in the world's second-largest economy, Sina is tapped into unstoppable demographic and technological trends. (In fact, Sina is only one of several hot tech stocks set to explode in 2016.)

Sina sells space to advertisers on SINA.com, a straightforward business model that generates about three-quarters of the company's revenue.

As China's middle class rapidly expands and flocks to the Internet, among the biggest beneficiaries will be Sina and its microblogging service Sina Weibo (WB) - Get Report , which was launched in August 2009.

Sina's derives revenue from fee-based, value-added services on its Sina Weibo platform. In 2014, Sina announced a spinoff of Weibo as a separate entity and filed an initial pubic offering. Sina retains 56.9% ownership in Weibo.

The number of Sina Weibo's registered accounts exceeds 500 million. Akin to a hybrid of Twitter and Facebook, Sina Weibo isn't just a business -- it's a cultural phenomenon in China, where news and tastes are the first to break.

Sina also offers corporate e-mail services and operates a gaming portal that provides users with downloads and access to popular online games.

Twitter is officially banned by the Chinese government, which worries that it would stoke subversive sentiment and facilitate anti-government demonstrations. The removal of this social media giant from China provides Sina Weibo a huge and rare opportunity.

Sina Weibo is given more leeway by the authorities because it's homegrown and the government applies strict rules regarding content. Sina Weibo is shrewd enough to apply self-censorship, a requisite for success in China's state-run mercantile economy.

SINA

data by

YCharts

Alibaba recently paid $586 million for a nearly 20% stake in Sina Weibo. The deal helped cement the microblogging service's lead over its competitors.

These social media companies are targeting young, Internet-hungry consumers in former rural areas. China's continuing rural-to-urban shift is one of the largest human migrations in history. City populations in China have expanded by more than 20 million over the last five years, mostly into the second-tier cities.

At the same time, China's economic policymakers plan to spend huge sums over the coming years to develop the country's Internet infrastructure, which in turn will facilitate premium streaming services.

Not surprisingly, these services are undergoing rapid consolidation.

In March 2012, Youku paid $1 billion to acquire Tudou, at the time No. 2 in the market and Youku's biggest rival. The combination of Youku and Tudou created a market leader that now commands more than a third of the online video market. Small wonder that Alibaba this week gobbled it up, to complement its own offerings.

As a smaller but growing player with an entrenched market position, Sina is ripe for a takeover -- and if that happens, the stock would probably soar. The company is scheduled to announced third-quarter earnings on November 12. The consensus forecast for earnings-per-share (EPS) in the quarter is 8 cents; the reported EPS for the same quarter last year was 11 cents. For Internet companies such as Sina that are aggressively investing in future growth, those operating results would be respectable and set the table for a strong 2016.

With a trailing 12-month price-to-earnings (P/E) ratio of only 15.9, a healthy market cap of $2.68 billion and little debt on its balance sheet, Sina offers outsized growth over the long haul for aggressive investors. The stock's trailing P/E compares very favorably to the P/E of 39.38 for its industry and the whopping P/E of 135.96 for a comparable U.S.-based company, Yahoo.

And if you're looking for other new ideas in the tech sector, I've found a small company that has the potential to surge at least 100% in 2016. This is a growth story with major momentum, so it's important to learn the full details as soon as possible inside my free report. The stock is trading under $8 a share, and its long-term prospects have never been better, making it a great value at today's price. Make sure you click here now to learn more.

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...