Thursday, December 9, 2010

The Twitter of China

It appears it is now fashionable to simply market something as "the [insert hot U.S. company] of China".... we continue to see garbage run ups in yesterday's Chinese IPOs.  Once you detach from any form of reality in valuation the prices can go anywhere, we saw that in 1999 - so (YOKU) is up another 15%ish today.  If not 50x sales, why not 60x or 100 or 1000x sales.  Honestly it is mind numbing to see a valuation of multi trillions for a company with $50M in sales.  Even if its growing at 100% a year, that is $100M in sales in 2011.... I bet 99.7% of speculators in the stock never went to the website, and of that group 90% have not looked at the financials.  But that's the dumbing down of the stock market - give me an easy to understand bumper sticker and I'll invest in it.  For those who say "look at!" I say after the IPO surge it did nothing for about a year before it began its run....

But that is neither here nor there.  A reader notified me about the "Twitter of China" a month ago, and it is inside a stock I've owned in the past (pre blog): Sina (SINA).   If flippin is worth $2-$3B than I suppose Sina should be worth $10B on the Twitter component (Weibo) alone.   I was hoping to keep it a secret until I launch but my (ironically) Twitter buddy Eric Jackson who writes for let the cat out of the bag yesterday.  Judging from the stock's movement of late, it looks like we are not the only ones who had caught onto this 'secret'.

Rather than recreating the wheel, let me just point you to Eric's excellent article, so that you dear reader can get into the Twitter of China right now!  No need to wait for an IPO which opens up 125%.  Hopefully Sina unlocks the value of Weibo via a spinoff and/or IPO.    Does Weibo make money?  WHO CARES - Youku doesn't.  It's all about eyeballs people! (remember 1999?  1.3 billion eyeballs instead of 300M eyeballs in fact)  Twitter has a private valuation of about $4 billion surely Weibo with 1.3 billion eyeballs should be worth 3 times as much - $12 billion.  My valuation model?  Don't ask such questions, just go with it - we're all gonna be rich.

(p.s. the same reader notified me that "the Facebook of China" RenRen - has filed for IPO as well - giddee up.  I did some research and there are actually four "Facebooks of China" but don't let that stop you from bidding the stock up 200% from the IPO price when it comes public.  Never let details get in the way of mad money)

  • Most American investors are aware that Sina(SINA_) and Sohu(SOHU_) are among the big Web portals of China. They know that both have been around for a long time and that both sites look cluttered with information and ads compared with their American counterparts. However, there's much more to the story, especially with what's been cooking at Sina over the last 18 months.
  • Youku, one of China's "YouTubes," will come public later this week, while one of China's "Facebooks" -- Renren -- will come public in the coming weeks.
  • Sina, however, has managed to grow its own Twitter. It's called Weibo and it's the biggest reason for the recent ramp-up in the stock price and why Sina is still considerably undervalued compared to where it will be in six to 12 months from now.
  • Most are familiar with Twitter's success story. It started in late 2006 so it's now four years old. People at first couldn't understand who would be self-indulgent enough to update the world that he just ate a ham sandwich. Few realized that for many users the Twitter stream would become a primary way of getting information -- like an old RSS fee -- as well as staying in touch with friends and on top of areas of interest.
  • According to Wikipedia, Twitter now has 190 million users, generating 65 million "tweets" a day and 800,000 search queries a day. Some have estimated that Twitter will generate $190 million in revenue in 2010. Just last week, Twitter raised a new round of financing valuing the company at $3 billion.  (if Youku with $50m revenue can be worth $2-3B then Twitter with $190m revenue should be $8-12B.... indeed Apple should be worth $82 gazillion with Youku's price to sales valuation)
  • Twitter is blocked in China, like Facebook and YouTube. This gave Sina the opportunity to take a hot proven Web concept and release it itself to the Chinese market. Sina launched Weibo 18 months ago
  • Amazingly, within six months of launch, Weibo had 75 million users. Sina recently announced that at current growth rates Weibo would surpass Twitter for the largest number of users in the world by the end of March 2011.
  • One of the things that Sina was smart to do early on was approach a large number of celebrities and Chinese thought leaders to join Weibo. It helped to drive user adoption as people want to keep up with the Ashton Kutchers and Alyssa Milanos of China, I suppose. Sina also recently has launched a $300 million fund for developers creating applications that link to Weibo's open API, which is supported by China's top two venture capital funds IDG Capital and Sequoia Capital. Many Chinese businesses are now advertising their Weibo sites on Web banner ads on Sina and other Chinese portals.
  • Unlike the U.S., you can expect that Weibo will face intense competition in China. (won't matter to the speculators) Sohu already has announced its intention to catch up and surpass Weibo with its own service. Sohu promises it also will get celebrities and that switching costs will be low for users. I think it's overstating how easy it will be. When a service is free like this for users, and filled with your existing friends, why switch?
  • Which brings us back to Sina. Twitter received its $3 billion valuation as a stand-alone business. Weibo gets to more fully integrate itself into Sina (referring Web links, blog posts, and photos to other Sina sites, capturing those additional page views). All these page views make the traditional portal business of Sina's that much more valuable.
  • Although no definitive study has been done yet, it's clear that Weibo's users' incomes are lower than Twitter's. So even when Weibo's service passes Twitter in size, you could argue that it's not as valuable to advertise on. (Eric continues to use thoughtful logic, which is useless for speculation - see Youku )
  • Yet the growth rates in the two businesses are remarkably different. In less than two years, Weibo would be bigger than Twitter. And Weibo's growth will just be kicking in to high gear next spring (approaching the "hockey stick" part of its adoption). Twitter's growth has plateaued since its founders appeared on Oprah Winfrey's show a couple of years ago. And, of course, the income of Weibo users keeps growing, whereas Twitter users incomes will stay the same.  (are you implying Americans are not getting richer by the moment?  Bernanke would argue with you - just wait until QE5)
  • Sina currently is a $4.3 billion company with a Weibo service that arguably is worth $4 billion today. (Eric, $4B?  Let's make it $10B.  Maybe $25B if the investment bankers can really sell it to the American populace.  After all money is free in America and 1999 redux is here) You're basically getting the portal business for free. Sohu's portal business --which also contains online gaming so it's not a pure apples-to-apples comparison -- is worth just under $3 billion.
  • Sina's stock price is up 63% in the last three months, but I expect it could double in the next six months as the market starts to better realize the power of Weibo now and moving forward for Sina.

No position but expecting to make mad money buying "the anything of China" in the next decade

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