Renren Shares — 3 Pros, 3 Cons

by Tom Taulli | May 4, 2011 12:28 pm

Renren (Nasdaq:RENN[1]) is called the “Facebook of China.”  So it should be no surprise that its initial public offering has been red-hot.

On Wednesday, Renren issued 53.1 million shares at $14 each.  In early morning trading, the shares hit $20.79, up 39%.

Like Facebook, Renren got its start in China’s university system.  It was a great way to quickly build a community.  By late 2007, Renren opened the site to the general public. 

The main target is now young urban professionals.  No doubt, this is an attractive demographic for advertisers. But is Renren a good investment?  Let’s take a look at the pros and cons:

Pros

China’s top social network. Renren has roughly 117 million users, and it has access to Facebook-like features, including news feed updates, instant messaging, photo sharing, games, music downloads, and videos. 

Renren also has built other social networking sites.  For example, nuomi.com is for social commerce and jingwei.com is focused on business purposes, similar to LinkedIn.

Strong growth. Renren is adding about 2 million activated users each month.  The engagement also is high.  On average, users spend about seven hours on the platform every month month. 

Network effect.  This is a powerful concept.  As a social network gets larger, it should attract even more users, since it’s the “in” place.  This virtuous cycle creates lots of velocity in user traction and makes it extremely difficult for competitors to keep up.  Also, as users put more of their information on a social network, it gets more costly to move elsewhere.

Cons

Fickle consumers.  So far, Renren has done an excellent job in evolving its platform and keeping it relevant.  But this is extremely hard to keep up.  As seen with sites like MySpace and Friendster, user enthusiasm may diminish.  And when this happens, the consequences can be severe.

Competition. Renren faces tough rivals.  And as the company expands into unfamiliar areas, it will further increase the competitive pressures.  If not executed right, the company could get distracted and experience a falloff in growth.

Just some of the rivals include Tencent, kaixin001.com and Sina (NASDAQ:SINA[2]).  There’s even buzz that Facebook will team up with Baidu (Nasdaq:BIDU[3]) to get a piece of the Chinese social networking market. 

Accounting issues.  Just a few weeks ago, Renren’s prospectus indicated that its monthly user base grew by 29%.  Well, it was a typo.  The real number was 19%.

What’s more, Renren’s chairman of the audit committee, Derek Palaschuk, resigned a few days before the offering.  He is the CFO of another company that is being accused of an accounting scandal.

Verdict

Renren says it has a “geek” culture, which is constantly striving to innovate.  For example, the company recently launched a check-in system, in which users can indicate their locations.  There are also plans to launch mobile games.

Renren is also having much success with monetizing its user base.  A key is its use of “social ads.”  These allow advertisers to target users based on interests, which are based on the interactions on the site.  Often, the conversion rates are higher than typical banner ads. 

But the fact is that Renren is trading at an extreme valuation of over 100 times its 2010 revenue.  And of course, the competitive pressures are serious.

In light of the risks, the cons outweigh the pros on the stock.

Tom Taulli’s latest book is “All About Short Selling[4]” and his Twitter account is @ttaulli[5].  He does not own a position in any of the stocks named here.

Source URL: https://investorplace.com/2011/05/renren-rennshares-3-pros-3-cons/

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