Weibo’s (NASDAQ:WB) experienced a sharp decline, with its stock plummeting by approximately 6% on Thursday. This significant downturn came in the wake of a decision by BofA Securities to downgrade the company’s shares from Buy to Underperform, citing its susceptibility to macro and competition-related risks.

BofA’s Downgrade and Its Impact on Weibo

The downgrade also entailed a reduction in Weibo’s price target, adjusted down to $10 from $19.5. According to the analysts at BofA, Weibo is potentially more exposed to macro and competition risks compared to major ad platforms. They highlighted that the bulk of Weibo’s ad revenue emanates from consumption-related verticals, specifically fast-moving consumer goods (FMCG), serving primarily brand promotion purposes.

Furthermore, the analysts at BofA anticipate that spend on brand promotion ads will remain subdued in 2024 due to macro factors and a shift by advertisers towards performance-based ads. They expressed concerns regarding competition from short video platforms and other social channels, which could have an adverse impact on Weibo’s traffic and ad revenue.

Despite Weibo’s efforts to bolster its video content, it is still predominantly perceived as a platform for text and image sharing, with a limited ecommerce ecosystem, as outlined by the analysts.

Identified Risk Factors

The analysts at BofA also identified several additional risk factors. These included uncertainties surrounding Alibaba’s shareholding in Weibo, especially in light of recent reports of Alibaba’s divestment from other investees. They also emphasized that Weibo lags behind peers with deeper pockets and stronger AI capabilities in the generative artificial intelligence (Gen AI) race.

Considering the forecast for 2024, the analysts envisage underperformance for Weibo’s ad revenue compared to its peers. They predicted a 5% year-over-year growth for Weibo, compared to double-digit growth for social media peers such as Tencent, Kuaishou, and Bilibili, and high single-digit growth for ad peer Baidu. BofA’s outlook for the online ad market ranges between 5-10% growth.

Financial Projections and Market Response

Consequently, the analysts at BofA revised Weibo’s 2024E topline to USD1.83B, reflecting a 5% year-over-year increase from the previous forecast of USD1.87B, with a 7% year-over-year growth. Similarly, the adjusted net profit for 2024E was adjusted down to $541M from $565M, representing a 5% year-over-year rise from the previous forecast of 10%.

The downgrade was also accompanied by a sizable decrease in the 2024E adjusted diluted EPS to $2.05, down by 4% year-over-year from $2.37. This adjustment factored in the potential share dilution stemming from the issuance of $330M in convertible senior notes for refinance purposes.

The Seeking Alpha Quant Rating system has classified Weibo as a Hold, which has consistently outperformed the market. However, the average Wall Street analysts’ rating is more positive, leaning towards a Buy recommendation.