Weibo Bears Paying Up After IPO as Short-Sale Costs Soar

Weibo Bears Paying Up After IPO as Short-Sale Costs Soar

By Boris Korby – May 12, 2014

It didn’t take long for stock traders to sour on Weibo Corp. (WB)

The stock has erased almost all of the 36 percent rally posted in the first three days after its April 16 initial public offering in New York, and traders are lining up to bet against it. The cost to borrow the Chinese microblogging service’s shares to short them is rated a 9 by Markit, the second-most expensive level on the London-based research firm’s scale.

Weibo’s IPO came as Internet stocks tumbled amid concern that valuations were too rich. The shares were priced at $17 and rose to $23.15 in the first week. They closed at $17.86 on May 9. The Global X Social Media Index exchange-traded fund is down 26 percent from its March 6 record.

“Weibo’s not one of the companies that you feel has a mature business model,” Cheng Cheng, an analyst at Pacific Crest Securities LLC inPortland, Oregon, said by phone on May 9. “The whole sector has been under pressure for a couple of weeks now.”

The stock plunged 11 percent last week while the Bloomberg index of the most-traded Chinese stocks declined 1.4 percent during the same period. Weibo added 2.9 percent to $18.38 at 9:38 a.m. in New York today.

An e-mail to Weibo in Beijing seeking comment on the trading wasn’t returned. An inquiry to an external spokesman in the U.S. was referred to the main office in China.

Short Interest

About 11 percent of Weibo’s shares available for trading are on loan, Markit’s data show. That compares with an average of about 3.8 percent for the Nasdaq Composite Index (CCMP) and 8.5 percent for its U.S. peer Twitter Inc. (TWTR)

Weibo, which has a market value of about $3.6 billion, is one of 68 most expensive stocks to borrow among the Nasdaq Composite Index’s approximately 2,500 members. It would be the most costly to short in the Standard & Poor’s 500 Index had it been a part of the benchmark index for U.S. equities.

“We are currently seeing rates north of 30 percent annually of the share price to short Weibo, which makes it one of the most expensive stocks within the technology sector,” Andrew Laird, a New York-based product specialist at Markit, said in an e-mail.

About 2.27 million of the approximately 20 million American depositary receipts that currently trade have already been lent, the first step in a short sale, according to data compiled by Markit. Investors pay higher fees to bet against a stock when there is strong demand and a small supply of shares available to borrow.

Tencent’s WeChat

Weibo will be able to fend of competition from Tencent Holdings Ltd. (700)’s WeChat messaging application as it adds users, according to Michael Clendenin, managing director at market researcher RedTech Advisors.

“When you look at the number of new users coming onto the platform and the activity of the platform, it’s still going up,” Clendenin said in a Bloomberg Television interview in April after the IPO. “Investors are comfortable in knowing that the future of Weibo on mobile is pretty well intact.”

Weibo operates a social media website similar to Twitter’s that allows users to post short messages. About 79 percent of its $188.3 million in revenue last year was from advertising and marketing last year, filings show. That amounted to about $1.46 in sales for each of its 129.1 million active monthly users.

Backed by Chinese Internet companies including Sina Corp. and Alibaba Group Holding Ltd. Weibo is unprofitable, posting losses for the past three years, the filings show. It raised $285.6 million in the IPO, after offering the shares for $17 to $19 apiece.

“There was some pessimism going into the offering,” Pacific Crest’s Cheng said. “The market’s appetite for Weibo hasn’t been as much as the company thought.”

To contact the reporter on this story: Boris Korby in New York at bkorby1@bloomberg.net