Weak advertising and AI investment lower earnings forecasts; J.P. Morgan maintains Neutral rating on Weibo

Overview

The report examines Weibo's advertising demand, AI applications, and the impact of related investment on earnings and valuation. J.P. Morgan believes the advertising business will reach its low point in 3Q26. Although AI has improved the efficiency of advertising creatives and content moderation, investment has yet to peak, and near-term margin pressure outweighs the operating benefits. It therefore lowers its earnings forecasts and target prices while maintaining a Neutral rating.

Core views

J.P. Morgan reiterates its cautious view on Weibo. The report cuts FY26E and FY27E adjusted EPS estimates by 14% and 6%, respectively, from US$1.25 to US$1.08 and from US$1.43 to US$1.35, due to weaker-than-previously-expected advertising revenue and incremental AI investment weighing on margins. The FY26E revenue forecast is broadly unchanged, while the FY27E revenue forecast is reduced by 1%; the report believes visibility into macroeconomic improvement for the advertising industry remains limited. For the full year, FY26 advertising revenue is expected to be flat YoY, implying a 4% YoY decline in 2H26. Advertising revenue is expected to reach its low point for the year in 3Q26, declining 4% YoY. The report attributes the weakness to three factors. First, advertising budgets from food delivery and instant retail, which were primarily concentrated in the third quarter of 2025, have fallen to nearly zero in 2026. Second, due to the advertiser mix and Xiaohongshu becoming the official social media partner of the FIFA World Cup, incremental advertising budgets generated by this World Cup are expected to be lower than for previous tournaments. Third, advertising spending by the AI application industry is expected to be lower in 2H26 than in 1H26, with first-half spending more concentrated in the first quarter. Automotive is the only clear bright spot, as intensive launches of new NEV models have supported related advertising demand. The AI business is demonstrating tangible application benefits, but its near-term financial impact remains negative. AI-generated creatives currently account for 50% of performance advertising consumption, and the related creatives receive approximately 30% fewer negative user responses. AI has also delivered significant efficiency improvements in advertising and content moderation. However, management continues to view AI investment as an important means of maintaining user retention and long-term engagement, making infrastructure spending the primary reason for the margin decline in 2026. The report expects FY26 gross margin to decline from 76% in FY25 to approximately 71%, while operating margin narrows to 23%, down 3.5 percentage points YoY. The more precise figures in the financial forecast table show gross margin declining from 76.0% in FY25A to 70.6% in FY26E and adjusted EBIT margin declining from 29.8% to 25.1%, before recovering to 71.6% and 27.0%, respectively, in FY27E. Financial forecasts show revenue increasing from US$1.757 billion in FY25A to US$1.763 billion in FY26E, US$1.780 billion in FY27E, and US$1.800 billion in FY28E, corresponding to YoY growth of 0.1%, 0.3%, 0.9%, and 1.2%. Adjusted net income is expected to decline from US$440 million in FY25A to US$292 million in FY26E, before recovering to US$367 million in FY27E and US$412 million in FY28E. Adjusted EPS is projected at US$1.69, US$1.08, US$1.35, and US$1.51, respectively, corresponding to a 36.2% YoY decline in FY26E, 25.5% growth in FY27E, and 12.0% growth in FY28E. Free cash flow is estimated to decline from US$477 million in FY25A to US$377 million in FY26E and US$358 million in FY27E, before recovering to US$411 million in FY28E. Although the valuation is not high, the report believes it is insufficient to constitute a near-term rerating catalyst. Based on consensus earnings, Weibo trades at approximately 5.5x 2026E P/E. J.P. Morgan continues to base its target prices on 7x 2026E P/E, corresponding to December 2026 target prices of US$8 for WB.US and HK$60 for 9898.HK, down from US$9 and HK$70, respectively. This 7x valuation is 55% above Weibo's historical low of 4.5x forward P/E in October 2022. The report believes this premium is supported by marginal improvement in the macroeconomic and revenue outlook, the current shareholder return strategy, and a more attractive risk-reward profile. However, until advertising revenue stabilizes, AI investment peaks, and quantifiable returns emerge, the report expects the shares to lack near-term drivers for a further rerating and therefore maintains Neutral ratings on both listed securities.

Analysis framework

The report first breaks down 3Q26 advertising demand by advertiser industry, identifying changes in food delivery and instant retail, the FIFA World Cup, AI applications, and automotive advertising. It then assesses the operating benefits of AI using the adoption rate of AI-generated creatives, user feedback, and moderation efficiency, before mapping infrastructure investment to gross margin, operating margin, and EPS forecasts. Finally, it bases its target prices on 2026E P/E and compares this with the historical valuation low and consensus valuation.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Analyze advertising budget demand by advertiser industry

  The report separately examines budgets for food delivery and instant retail, World Cup-related advertising, AI applications, and the automotive industry to explain why 3Q26 advertising revenue is expected to reach its low point for the year.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Link AI investment with revenue, margins, and EPS

  The report distinguishes between product efficiency improvements from AI and near-term cost pressure from infrastructure investment, and adjusts its gross margin, operating margin, and EPS forecasts accordingly.

• Valuation MethodP/E and PEG Valuation

  Determine target prices based on 2026E P/E

  The target prices for both WB.US and 9898.HK are based on 7x 2026E P/E and are compared with the consensus valuation of 5.5x and the October 2022 low of 4.5x forward P/E.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Weibo Corporation (WB.US)

  Weibo's U.S.-listed security; earnings forecasts and operating assessments are consistent with those for the company as a whole.

  Strengths

  AI-generated creatives now account for 50% of performance advertising consumption, receive approximately 30% fewer negative user responses, and have improved advertising and content moderation efficiency.

  Weaknesses

  Advertising revenue is weak, while AI infrastructure investment is weighing on near-term margins and EPS.

  Comparison

  Represents the same economic exposure as 9898.HK; the report does not compare the fundamental merits of the two listed securities.

  Risks

  Further weakening in advertising demand, higher-than-expected marketing spending, competition from social and entertainment platforms, and online media regulatory risks.

• Weibo Corporation-H (9898.HK)

  Weibo's Hong Kong-listed security; the same operating forecasts and Neutral rating apply.

  Strengths

  AI applications have delivered efficiency benefits in advertising creatives and moderation, while automotive advertising is supported by intensive launches of NEV models.

  Weaknesses

  3Q26 advertising revenue is expected to reach its low point for the year, while AI investment has yet to peak and is weighing on margins.

  Comparison

  Represents the same economic exposure as WB.US; the report does not compare the fundamental merits of the two listed securities.

  Risks

  Further weakening in advertising demand, higher-than-expected marketing spending, competition from social and entertainment platforms, and online media regulatory risks.

Key data

• FY26 Advertising Revenue GrowthFlat YoYCorresponds to a 4% YoY decline in 2H26.
• 3Q26 Advertising Revenue GrowthDown 4% YoYThe report expects this to be the weakest quarter of 2026.
• FY26E Adjusted EPSUS$1.08Previously US$1.25, representing a 13.6% cut, summarized in the main text as a 14% cut; expected to decline 36.2% YoY.
• FY27E Adjusted EPSUS$1.35Previously US$1.43, representing a 5.5% cut, summarized in the main text as a 6% cut.
• Share of AI-Generated Creatives50%Share of performance advertising consumption.
• Negative User Feedback on AI CreativesApproximately 30% lowerReflects an improved user experience for AI-generated creatives.
• FY26E Gross MarginApproximately 71%76% in FY25; the precise forecast-table figure is 70.6%.
• FY26E Operating Margin23%Expected to narrow by 3.5 percentage points YoY.
• WB.US Target PriceUS$8.00December 2026 target price, previously US$9.00; the current price on August 19, 2026 was US$7.49.
• 9898.HK Target PriceHK$60.00December 2026 target price, previously HK$70.00; the current price on August 20, 2026 was HK$57.00.
• Target Price Valuation Multiple7x 2026E P/E55% above the historical low of 4.5x forward P/E in October 2022.

Impact & implications

The report believes AI has improved advertising creative performance and moderation efficiency, but infrastructure investment continues to weigh on margins and earnings in 2026, while advertising demand also lacks clear support from a macroeconomic recovery. The low valuation provides some risk-reward support but cannot drive a near-term rerating on its own. Valuation improvement requires advertising revenue to stabilize, AI investment to peak, and quantifiable returns to emerge.

Risks

• An economic slowdown could cause advertising demand to be weaker than expected.
• Marketing spending could be higher than expected, further reducing earnings.
• Other social and entertainment-oriented platforms could create greater competitive pressure.
• The online media industry faces regulatory risks.
• If the advertising market improves faster than expected, actual performance could exceed the report's cautious forecasts.
• If competitive pressure eases, the rating and target prices could face upside risk.

What to watch

• Monitor whether 3Q26 advertising revenue declines 4% YoY as the report expects and becomes the low point for the year.
• Watch for when advertising revenue stabilizes, particularly changes in budgets for food delivery and instant retail, the FIFA World Cup, AI applications, and the automotive industry.
• Monitor when AI infrastructure investment peaks and whether gross margin and operating margin begin to recover.
• Watch whether improvements in AI-generated creatives and moderation efficiency can translate into quantifiable revenue or earnings returns.