Twitter (NYSE: TWTR) rallied in late October after its third quarter numbers beat analyst expectations. But the stock remains far below its IPO price of $26, which it hasn't seen in two years.
I previously told investors to avoid buying Twitter, since its core advertising business remains weak. Instead, investors should consider buying Weibo (NASDAQ: WB) -- the "Twitter of China" -- which is generating much stronger growth than its western counterpart.
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An evolving platform vs. a stagnant one
A persistent criticism of Twitter is that the platform is slow to evolve. Twitter only recently increased its 140 character limit to 280 characters, while Weibo completely dropped the limit in early 2016. Moreover, 140 characters in Chinese was already more generous than 140 characters on Twitter, since each Chinese character is a single word.
Weibo also added nested comments, as Facebook (NASDAQ: FB) did in 2012, to clear the clutter. Yet Twitter's system of replying to messages remains a confusing mess of "@ replies," which are arguably harder to follow.
Weibo also grouped popular accounts -- like celebrities, media channels, and brands -- in a central Reddit-like directory, which made it easier for users to explore the platform. Twitter still doesn't have a comparable directory. Weibo's live video platform also allows popular content creators to generate revenue by receiving virtual gifts (which are purchased from Weibo), a clever monetization strategy which Twitter's Periscope only recently scratched with its "Super Hearts" feature.
Therefore, Weibo is arguably more similar to Facebook, a platform that repeatedly reinvents itself to boost user engagement, than Twitter, which often seems stuck in the past.
It's a less controversial platform
Over the past few years, Twitter's reputation was tarnished by cyberbullying, racism, sexual harassment, and the circulation of fake news proliferated by a network of bot accounts. President Trump's incessant, often inflammatory tweeting is also raising serious national security concerns.
Twitter recently admitted that Russian operatives used bot accounts to split Americans during last year's election, and that it sold ads to Russian-backed news agencies. This mess makes Twitter a potential landmine for advertisers.
Meanwhile, Weibo is closely monitored by Chinese regulators, who occasionally tighten their grip on the platform. It suspended certain live video broadcasts (due to Weibo's lack of an updated license), demanded users register their real names, and fined the company for hosting banned content.
Those incidents seem troubling, but they're all self-contained and easily resolved as long as Weibo plays by the rules. Weibo isn't ensnared in ever-expanding dramas about ad purchases from foreign governments or inflammatory messages, since it tightly controls its messages with a team of censors.
Much healthier growth figures
Last quarter, Twitter's revenue fell 4% annually to $590 million as its ad revenues dropped 8% to $503 million. That decline was attributed to a reduction in ad prices, which was meant to boost the number of ad purchases.
Weibo doesn't have that problem at all. Its total revenue surged 81% annually to $320 million last quarter, while its advertising and marketing revenues rose 77% to $277 million.
On the bottom line, Twitter's non-GAAP net income rose 28% annually to $78 million. But on a GAAP basis (weighed down by stock-based compensation expenses), it still posted a loss of $21 million, compared to a $103 million loss in the prior year quarter.
Weibo is profitable by both non-GAAP and GAAP measures. Its non-GAAP net income surged 111% annually to $115 million last quarter, and its GAAP net income rose 215% to $101 million. Analysts expect Twitter's non-GAAP earnings to grow just 8% this year, compared to 107% growth for Weibo.
Lastly, Weibo has a bigger user base. Its monthly active users (MAUs) rose 27% annually to 376 million last quarter. Twitter's MAUs rose just 4% to 330 million.
So what's the catch?
Weibo easily beats Twitter in head-to-head comparisons of revenue, earnings, and user growth. But Weibo's biggest weakness is its valuation. Its trailing P/E of 96 is much higher than the industry average of 38 for internet content providers. Its forward P/E of 42 looks more reasonable, but its 170% rally this year could abruptly pop during a market downturn.
But Twitter looks worse, since its top line growth is dismal and its earnings only "improved" after it laid off hundreds of workers and shuttered or sold several business units. That strategy is unsustainable as the company's ad revenues keep falling. Therefore, investors looking for a "Twitter-like" social media play without Twitter's baggage should take a much closer look at Weibo.
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