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WB a Strong Buy on Pullbacks

By Matt McCallAug 10, 2017

The second-quarter earnings season has been a strong one so far, but when you look at how the companies that have reported results performed the day after the announcement things get interesting.

The average one-day change was -0.64%, which is the worst reaction in three years. Those companies that beat estimates gapped higher by an average 1.34% before closing the day with just a 0.8% gain. And those that missed opened down 2.75% and closed with an average loss of 3.23%.

So even though this has been a good season overall, companies that have been able to beat analyst predictions have had a tough time continuing the rally. Why? I believe we’re seeing a prime example of “buy the rumor, sell the news.” In other words, many of the expectations had already been baked into the share prices.

We saw this play out again following Weibo’s (WB) second-quarter report that came out before the open on Wednesday. This leading Chinese social media platform beat on both the top and bottom lines, with earnings of $0.38 a share besting estimates by $0.02 while revenue grew 72% to $253.6 million and came in $6.65 million ahead of the consensus. Advertising and marketing revenue, which is the statistic that matters most to investors, increased 72% to $218.3 million.

Two other important metrics for this tech company include monthly active users (MAU) and average daily users (ADU). Both were strong in the second quarter, with MAU increasing 28% to 361 million in June and ADU growing 26% to 159 million.

Looking ahead, WB provided third-quarter guidance that was also better than expected. Wall Street had been looking for revenue of $276.1 million, but management forecasted $290-$300 million. The company expects to generate strong bottom-line growth over the long term, with earnings anticipated to rise from $0.82 a share last year to $2.46 a share next year and more than $4.50 a share by 2020. Based on that growth potential alone, WB is an attractive buy on all pullbacks.

Despite the strong report, the stock was up only 1% on Wednesday, once again proving the fact that investors had already baked decent numbers into the share price. WB weakened on Thursday, and I’d like to see it continue to pull back and consolidate near $80 (the black line), which is a level that has acted as resistance in the past. At that point, the chart would be signaling a great buying opportunity – especially as I see the stock climbing to $100 by the end of the year.

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