Pricey Progress for Sina and Tencent; Two Popular Chinese Internet Companies Are Expanding Their Users, but Buying In at Today’s Prices Requires a Leap of Faith

Pricey Progress for Sina and Tencent

Two Popular Chinese Internet Companies Are Expanding Their Users, but Buying In at Today’s Prices Requires a Leap of Faith

AARON BACK

Updated Nov. 13, 2013 6:10 p.m. ET

China’s Internet companies differ from America’s in many respects, but one thing they share are stock prices prone to bouts of speculative excess. Take Sina SINA +11.38% and Tencent Holdings, 0700.HK -4.01% two investor darlings with the promise of massively popular social networks. At their peaks last month just before Twitter TWTR +1.67% euphoria went into high gear, shares in both were up over 80% from the start of the year. They have both fallen since then, but remain faith-based plays on monetizing deep pools of users.Third-quarter results at the two companies provide a chance to gauge recent progress. The news from Sina is encouraging. Weibo, its Twitter-like microblogging service, earned $53 million of revenue in the third quarter, up from $38 million in the second quarter, mostly from ad sales. The company says Weibo is close to breaking even.

At Tencent, the picture is less clear. It didn’t give figures for revenue at WeChat, its mobile messaging social network. Tencent has only started in the past few months to earn money from mobile service, using it as a platform to sell online games.

The good news is that WeChat now boasts 272 million monthly active users, up 15% from three months ago. A direct comparison with Weibo is difficult because Sina provides only a figure for daily active users, which are now at 60 million, up 11% from three months ago.

The biggest difference between the two companies is their core businesses. Tencent has more than 800 million users for its desktop platforms, including messaging and online games. Although some of these offerings are now shedding users as people spend more time on smartphones, it still saw net profit rise 20% from a year earlier to $629 million in the third quarter.

Sina’s main legacy platform is a portal specializing in news, which is prone to cyclical swings in online advertising. Its third-quarter net profit more than doubled from a year earlier but was far smaller at $25.4 million.

Tencent is valued by the market at nearly $100 billion, or more than 35 times this year’s estimated earnings. That is expensive for a company with 20% profit growth, though not necessarily unreasonable by the standards of some U.S. Internet giants. To justify that multiple, it still needs to show that it can increase mobile profits much faster than its desktop businesses decline.

Sina trades at over 86 times earnings. Its $5 billion market cap largely reflects what investors think its 71% stake in Weibo is worth. And that hinges on Weibo doing a lot more than just breaking even with its user base.

Sina and Tencent are making progress building up and monetizing mobile users. Their share prices, however, still assume a lot of future good news.