Undervalued, potential for significant reversal

Weibo NASDAQ:WB stocks are deeply undervalued and ripe for a turnaround. The stock trades at just 5 times its earnings, the lowest among Chinese social media players, and analysts see nothing but upside. Lukewarm results or not, China’s slow recovery or not, bearish sentiment or not, this market has overextended and is set to reverse.

The price action following the Q4 results is not solid but shows support at a critical level, above the previous three bounces, in line with the 6-day and 30-day EMAs and a stepping stone to higher prices. The question is whether the market will follow the signal or whether Weibo will remain range-bound until the end of the year.

Weibo struggled in the fourth quarter but has the leverage to rebound

The main downside to the Weibo story is that the recovery is unfolding more slowly than expected. The company grew in the fourth quarter and outperformed forecasts by 150 basis points, but it doesn’t expect significant acceleration anytime soon, and whispers were hoping for more.

The sluggish Chinese economy is affecting internet traffic and consumer spending, which is not improving as hoped, and competition is increasing. However, advertising sales grew 3%, compounded by a 5% increase in value-added services, with DAUs advancing 2%, reversing last year’s declines and allowing the company to continue growing this year. year.

Earnings were lower than consensus, but several one-off events made the numbers difficult to compare. Those include benefits reported last year and higher taxes this year, leaving earnings down about a cent and 19 cents below consensus. The point is that this company makes money and returns capital to shareholders. The board declared a special dividend worth 8.7% with share prices near long-term lows.

The balance sheet is rock solid, so there are no red flags. The company’s cash position is healthy at $3.2 billion, with total liabilities of 1.4 times cash, 0.5 times assets and 0.24 times equity. These ratios suggest that the company could sustain its capital returns as a regular payment if it chooses to do so. Analyst chatter reflects this view, which is seen in the revisions.

Analysts rate the stock Hold but are lowering their price targets. The consensus figure has fallen by more than 50% in the last 12 months, but still assumes substantial upside and the market is trading below the low end of the analysts’ range. The only tracked report since the fourth quarter release comes from Goldman Sachs, which set a target of $10.60. This is more than 10% above the current stock and high enough to trigger technical buying. The low target is $9.80, an upside of about 5%.

Weibo’s institutional activity is in line with bottoming

Institutional activity is notable because the group has bought Weibo on its balance sheet for five consecutive quarters, and activity peaked in the first quarter of 2024. The group owns 69% of the shares, and recent buyers include Goldman Sachs , which increased its position by 200%. That purchase was made two weeks before the fourth quarter release and is now expected to show a profit. Weibo’s largest shareholder is Alibaba Group, which represents almost 40% of the total.

Technical Outlook: Weibo is hitting rock bottom

After six years of downward trends and a 95% contraction in its stock price, Weibo appears to be hitting bottom. The stock bottomed last year and has trended higher to align with a reversal pattern. The pattern is an irregular Double-Bottom or Head & Shoulders with a low near $8 and a baseline near $10.50.

The market is ready to move towards the $10.50 handle, and could break above there if another catalyst emerges. Potential catalysts include expectations of central bank easing in the second half of the year, which will mark a global economic turning point. A move above $10.50 would confirm the reversal and set the market up for further gains. In this scenario, the next target for critical resistance is near $11.25.

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