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Weibo Corp (NASDAQ: WB) is the leading social network company in Mainland China and is also known as “China’s Twitter”. Its leading social microblogging platform – Weibo – has monthly active users of 497 million as of September 2019.
After touching its all-time high of above US$140 in 2018, Weibo’s share price has since lost about 70% of its value.
This captures my attention. In particular, I would like to know whether the stock is cheap now.
There is no straightforward answer to the question above, since there are many ways to look at a company’s valuation.
Normally, I will look at three valuation metrics; price-to-book (PB) ratio, price-to-earnings (PE) ratio, and dividend yield to help me get a “feel” of the company’s valuation. In this case, however, PB and dividend yield will not be meaningful for us.
The former is not useful since Weibo employs very little capital in its business model (there are no factories, nor are there any inventories). The latter, on the other hand, is not relevant since Weibo pays no dividend.
Thus, we are left with the final metric – PE, which we will be using here.
To calculate our PE ratio, I’ll use the full-year net profit from 2018 of US$572 million, as well as Weibo’s current market capitalisation of about US$10 billion (as at the time of writing).
Putting both numbers together, we arrive at a PE ratio of 17.5. This seems a little high, especially if we compare that to the PE ratio of iShares MSCI Hong Kong Index Fund (NYSEARCA: EWH) of 13.1.
Nevertheless, since the company has about US$1.6 billion in cash and investments (net of borrowings), the cash-adjusted market capitalisation would have been US$8.4 billion. This would give us an adjusted PE ratio of 14.7.
Though 14.7 is still higher than the market average of 13.1, I personally think that it’s a fair price to pay for the company – especially considering the growth opportunities available to it.
In sum, Weibo is currently trading at a valuation that’s slightly ahead of the market average’s valuation (based on the iShares MSCI Hong Kong Index Fund).
Yet, I think the valuation is rather cheap given the prospects that the company has in growing its business.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.