Weibo (NASDAQ: WB) stock is deeply undervalued and ripe for a reversal. The stock is trading at only 5x its earnings, the lowest among China’s social media operators, and analysts see nothing but upside. Tepid results or not, China’s slow recovery or not, downward trending sentiment or not, this market has overextended and is set up to reverse.
The price action following the Q4 results isn’t robust but shows support at a critical level, higher than the previous three bounces, aligning with the 6 and 30-day EMAs and a launch pad for higher prices. The question is whether the market will follow through on the signal or if Weibo remains range-bound until later in the year.
Weibo Struggled in Q4 But Is Set Up with Leverage for Recovery
The primary negative in the Weibo story is that the recovery is unfolding slower than expected. The company grew in Q4 and outperformed the consensus by 150bps but is not expecting a significant acceleration soon, and whisper figures were hoping for more.
Sluggishness in China’s economy is impacting internet traffic and consumer spending, which is not improving as hoped, and competition is rising. However, ad sales grew by 3%, compounded by a 5% gain in Value-added Services, with DAUs advancing 2%, reversing last year’s declines and setting the company to continue growing this year.
Earnings were weaker than the consensus, but numerous one-offs made the figures hard to compare. Among them are logged benefits in the prior year and higher taxes this year, leaving the earnings down about a dime and 19 cents short of the consensus. The takeaway is that this company makes money and returns capital to shareholders. The board declared a special dividend worth 8.7% yield with share prices near long-term lows.
The balance sheet is rock solid, so there are no red flags there. The company’s cash position is healthy at $3.2 billion, putting the total liability at 1.4x cash, 0.5x assets, and 0.24x equity. These ratios suggest the company could sustain its capital returns as a regular payment if it chooses to do so. The analyst chatter reflects that view, which is seen in the revisions.
Analysts rate the stock at Hold but are lowering their price targets. The consensus figure is down more than 50% in the last 12 months but still assumes a substantial upside, and the market is trading below the low end of the analyst range. The single report tracked since the Q4 release is from Goldman Sachs, which set a target of $10.60. That’s more than 10% above the current action and high enough it may trigger technical buying. The low target is $9.80, about 5% upside.
Weibo Institutional Activity Aligns with Bottoming
The institutional activity is noteworthy because the group has been buying Weibo on balance for five consecutive quarters, and activity spiked in Q1 2024. The group owns 69% of the stock, and recent purchasers include Goldman Sachs, which increased its position by 200%. That purchase was made two weeks before the Q4 release and should show a profit now. Weibo’s largest shareholder is Alibaba Group, which accounts for nearly 40% of the total.
The Technical Outlook: Weibo Is Bottoming
After six years of downtrend and a 95% contraction in the share price, it looks like Weibo is bottoming. The stock hit bottom last year and has trended higher to align with a reversal pattern. The pattern is a Double-Bottom or irregular Head & Shoulders with a low near $8 and a baseline near $10.50.
The market is poised to move up to the $10.50 region and may exceed that figure if another catalyst emerges. Among the potential catalysts is an expectation for central bank easing in the back half of the year that will signal an economic pivot globally. A move above $10.50 would confirm reversal and set the market up for additional gains. In that scenario, the next target for critical resistance is near $11.25.
