We are downgrading SINA Corporation (SINA) to Underperform, indicating that the stock would be trading below the industry average. The company’s five-year EPS growth rate of 14.2% is below the industry average. Our lower price target of $35.00, represents a P/E multiple of 31.8X 2010 EPS, a slight discount to the industry.
After posting strong results in 2008, SINA posted weak financial results for 2009, due to dismal macroeconomic conditions. Both its revenue and EPS were below year-ago levels.
The fourth quarter of 2009 was its first loss in years and was much below the Zacks Consensus estimate of a profit. On a non-GAAP basis, excluding one-time income and charges, but including stock-based compensation expenses, net loss was $23.8 million or 8 cents per share versus net earnings of $25.6 million or 43 cents last year and $17.2 million or 29 cents last quarter. The results were disappointing as it missed the Zacks Consensus Estimate of earnings of 32 cents, posting a negative surprise of 125%.
The company also provided a weak outlook for the first quarter of 2010, as a result of the slowdown in the Chinese economy, the global financial and credit market crisis and low visibility for its advertising business.
For the first quarter of 2010, SINA expects non-GAAP net revenues to be between $78 million and $80 million with non-GAAP advertising revenues of between $53.0 million and $54.0 million, or an increase of 43% to 46% year over year. Non-GAAP non-advertising revenues are expected to be between $25.0 million and $26.0 million, or a decrease of 15% to 18 % year over year.
However, we believe that SINA’s online advertising business has a competitive edge based on its popularity in China, superior brand recognition and persistent marketing innovations. We expect improvement in SINA’s advertising business, as advertising spending recovers. According to CTR Market Research, a market information and insight provider in China, advertising expenditure in China jumped by 13.5% year over year to $ 74 billion in 2009. Moreover, the research firm expects a 10% growth for the China advertising market in 2010.
Recently, Google Inc. (GOOG) has been forced to pull out of the fast-growing Chinese market as a result of an investigation over several weeks into China ’s Internet censorship system that revealed a systematic and targeted hacking into Google’s corporate infrastructure. Of course, SINA would welcome Google’s decision as it would reduce competition for the company.
However, this is likely to jeopardize SINA’s long standing partnership with Google signed in 2007. Sina.com, the company’s Chinese portal, signed a deal with Google, under which Google provided Web page search service for Sina.com. In return, Google shared the advertising revenue generated by traffic from China ‘s most-visited portal. Therefore, a termination of this agreement could hurt SINA’s search based revenues.
SINA has disappointed us of late and for the near term we do not expect SINA to witness growth. We advise investors to avoid the stock and downgrade SINA to Underperform.
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