SINA (NASDAQ: SINA) has been a stock market darling this year. Investors in the Chinese internet specialist are sitting on roughly 90% gains so far in 2017 as it has displayed remarkable revenue growth thanks to a terrific spike in its advertisement business.
SINA's growth has been largely fueled by its 46% stake in fast-growing Chinese micro-blogging platform Weibo (NASDAQ: WB), which supplies around 70% of the total revenue. But can SINA keep up its tremendous growth? There are two reasons to believe that it can, but potential competition from Tencent (NASDAQOTH: TCEHY) could scupper its chances of dominating China's social media space.
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The two catalysts
SINA is reaping the benefits of Weibo's growth. Its advertising revenue climbed 44% year over year last quarter thanks to a 72% jump in Weibo's online advertising revenue. Weibo, often called as the "Chinese Twitter," has gained a lot of popularity in the country as the rapid growth in its user base shows.
Its monthly active user base jumped 28% year over year to 361 million in the month of June, with 92% of the growth coming from the mobile platform. And Weibo has a lot of room to flex its muscles as smartphone penetration in China is on the rise. Data provided by eMarketer suggests that Chinese smartphone penetration stood at 53.3% at the end of last year, and could grow to 63.3% by 2019.
Meanwhile, SINA is looking to expand the scope of its business beyond Weibo by venturing into online financing. The company has put aside $500 million to set up an online finance fund that will invest in Chinese financial technology (FinTech) companies. FinTech is a fast-growing space in China, with an estimated annual growth rate of 27.4% in transaction value from 2017 to 2021.
Last quarter, SINA's non-Weibo business grew just 8% year over year. Therefore, the company is making a smart move by moving into the FinTech sector as this will help reduce reliance on Weibo and accelerate its revenue from other sources.
The big headwind
Tencent is the biggest roadblock that SINA will run into given its huge size and financial muscle. The former has created a strong ecosystem around its WeChat platform, which currently boasts of 963 million monthly active users. This is far greater than Weibo's count, so it won't be surprising to see advertisers swaying toward Tencent since it can give them access to a bigger market.
Tencent also enjoys an advantage over Weibo because users have been found to spend more time on its WeChat platform. This isn't surprising as Tencent has smartly evolved WeChat into a diversified ecosystem that allows users to launch a variety of services such as ordering cabs or food, as well as making online payments without the need to leave the app.
Tencent recently hired 1,500 developers to build mini-programs for WeChat, which can strengthen its position as a one-stop shop for almost everything, threatening Weibo's growth in the process.
Additionally, Tencent is a seasoned player in the Chinese FinTech industry. It had launched its online bank back in 2015, and has expanded its platform since then by partnering with the likes of China Rapid Finance Limited, the country's largest consumer lending marketplace.
Therefore, Tencent is quite capable of hitting SINA in critical areas. It has a sizable cash hoard of over $20 billion that can be used to launch new services or move deeper into existing markets. Meanwhile, SINA's cash pile of just $2 billion is small in comparison to Tencent's.
Investors, therefore, should keep a close watch on Weibo's user growth and SINA's progress in the FinTech space. These two factors will be critical to SINA's success in the long run, while Tencent poses stiff competition.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool recommends Sina and Weibo. The Motley Fool has a disclosure policy.