Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Weibo Corp (WB, Financial). The stock, which is currently priced at 12.38, recorded a loss of 9.65% in a day and a 3-month decrease of 12.94%. The stock's fair valuation is $33.28, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Weibo (WB, Financial) should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, and Altman Z-score of 1.49. These indicators suggest that Weibo, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding the Piotroski F-score and Altman Z-score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/ source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. Weibo's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Weibo Corp
Weibo Corp is a China-based company mainly engaged in the social media advertising business for people to create, discover and distribute content. The Company's activities include Advertising and Marketing, which mainly provides a full range of advertising customization and marketing solutions. The Value-added Services mainly provide services such as membership services on social platforms, online games, live broadcasts, social e-commerce, and others. The Company's main product is the social platform Weibo.
Analysis of Weibo's Profitability
Let's delve deeper into Weibo's financial health by examining the decline in its return on assets (ROA) over the past three years. The data indicates 2021: 5.43; 2022: 4.42; 2023: 3.56, when expressed in percentages. Such a decrease is concerning, as the Piotroski F-Score penalizes companies with lower current ROA compared to the previous period. This ongoing decline highlights another potential risk associated with investing in Weibo.
Observing the financials of Weibo, it's important to note that the cash flow from operations over the trailing twelve months (TTM) stands at $0 million, whereas the net income in the same period is significantly higher at $253.57 million. The Piotroski F-score considers this discrepancy as a potential red flag. The rationale behind this is that a company's operating cash flow is a more direct and less manipulated measure of its cash-generating ability than net income. Net income, while important, is susceptible to accounting treatments and non-cash items which can distort the true cash profitability of the company. If a company consistently shows lower cash flows from operations relative to its net income, it could indicate that the earnings quality is poor and the company might have difficulties sustaining its operations or financing its obligations, a fact which could negatively impact its financial stability and investor confidence.
Leverage, Liquidity and Source of Funds: A Worrying Trend
Examining Weibo's financial stability, there's a notable decrease in its current ratio over the past three years, as shown by the data 2021: 4.56; 2022: 2.27; 2023: 4.09, which is expressed as percentages. The current ratio is a key indicator of a company's short-term financial health, as it gauges the ability to cover short-term liabilities with short-term assets. A declining current ratio suggests that Weibo's liquidity and capability to manage immediate financial obligations are deteriorating.
Operating Efficiency: A Darker Picture
Examining the data provided: 2021: 229.30; 2022: 235.21; 2023: 236.90, it becomes evident that Weibo has seen an increase in its Diluted Average Shares Outstanding over the past three years. This trend signals that the company has issued more shares. While issuing additional shares can provide immediate capital for the business, it can also lead to the dilution of existing shares' value. This dilution occurs because the earnings of the company now have to be divided among a larger pool of shares, which could decrease Earnings Per Share (EPS). Consequently, if the company's earnings don't grow at a pace that matches or exceeds this share increase, it could lead to a reduction in the value perceived by existing shareholders, potentially impacting their investment returns. Hence, while additional share issuance may provide necessary capital, it is important to monitor its impact on shareholder value carefully.
Last but not least, concerning operating efficiency, the Piotroski F-score examines changes in gross margin and asset turnover. Regrettably, Weibo follows a discouraging trajectory with a decrease in gross margin percentage over the past three years, as demonstrated by the data provided: 2021: 83.14; 2022: 81.21; 2023: 78.38 (expressed in percentages). This contraction in gross margin suggests that Weibo is grappling with either an escalation in the cost of goods sold or dwindling prices - both of which are inauspicious indicators for profitability.
In terms of operational efficiency, another key indicator, Weibo has unfortunately reported a declining trend in asset turnover over the past three years, as evidenced by the data: 2021: 0.32; 2022: 0.32; 2023: 0.25 (expressed in percentages). Asset turnover measures how effectively a company uses its assets to generate sales, and a decrease in this ratio can indicate a drop in efficiency. This could be due to various factors, such as underutilization of assets or a decline in the market demand for the company's products or services. Consequently, this downward trend in asset turnover implies that Weibo may need to revisit its operational strategies to improve the utilization of its assets and boost its sales volume.
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for Weibo, its current score suggests potential troubles. This includes a decline in return on assets, a discrepancy between cash flow from operations and net income, a decrease in the current ratio, an increase in diluted average shares outstanding, a decrease in gross margin percentage, and a decrease in asset turnover.
Weibo's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Weibo's Altman Z-score reveals Weibo's financial health may be weak, suggesting possible financial distress.
Conclusion
In conclusion, while Weibo Corp (WB, Financial) may seem like an attractive investment due to its current price being below its intrinsic value, a deeper analysis reveals several risk factors that potential investors should consider. The company's low Piotroski F-score and Altman Z-score, coupled with its declining return on assets, current ratio, gross margin percentage, and asset turnover, suggest that it might be a value trap. Therefore, investors are advised to exercise caution and conduct thorough due diligence before making an investment decision.
GuruFocus Premium members can find stocks with high Piotroski F-score using the following Screener: Piotroski F-score screener .GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
