Renren (RENN), a Chinese social networking company, which is similar to Facebook (FB), has seen its share price fall from $16 a share at the IPO, to its current price around $3.30 a share. That is greatly undervalued and should provide investors with a nice 100% return from a long-term call options trade.
However, it is likely that there could be a few road bumps before the options trade comes to fruition — the first hurdle will be the earnings report for Q3 2013 on November 27, 2013. Analysts expect Renren to post negative earnings of ($0.10) per share and revenue of $48.26 million for the quarter.
It is believed that the company’s results will be weak in the third quarter, owing to pressure on both the top-line and the bottom-line and expectations are for a year-over-year decline in revenue during the third quarter, due to challenges in the online gaming and advertising segments. In addition, profitability will continue to be low due to investments in various growth strategies and losses from the Nuomi business.
If there is a surprise then the trade should complete quickly!
So, looking ahead to 2014, Renren has certain positive factors looming, which will help the stock price increase:
- an undervalued stock price,
- a possible take-over target, and
- the rapid growth in a trend for the internet in China.
Renren last issued its quarterly earnings data on Wednesday, August 14 and reported ($0.03) earnings per share for the quarter, beating the consensus estimate of ($0.07) by $0.04. The company had revenue of $49.60 million for the quarter, compared to the consensus estimate of $55.08 million. On average, analysts expect Renren to post ($0.24) EPS for the current fiscal year and ($0.22) EPS for the next fiscal year.
Renren saw a net annual revenue growth of 10.7% in Q2 2013 to $49.6 million. It recorded strong revenue growth at its Nuomi platform (a group buying site) and other Internet value added services (which includes 56.com and jingwei.com, a professional social network) at 69.4% and 43.5% respectively. However, the top-line growth within the online gaming and online advertising segments was low on account of various challenges.
Online gaming revenue growth dropped to 1.4% annually in Q2 2013, as compared to 53% annual growth in Q1 2013. This was caused by a delay in the launch of new Android games and certain older games reaching their maturity. Online advertising revenue growth stood at a mere 4.7% and 2.4% in Q1 and Q2 respectively, due to intense competition and low mobile monetization.
This scarcity of attractive big acquisition targets means that the social networking site Renren may become a big-name target in the near future.
Why Renren is Undervalued
Renren now offers significant value to potential investors:
- Renren.com generated $49.6 million in sales, which is a 10.7% year over year increase in sales from $43.4 million in the year ago quarter.
- Nuomi.com generated $6.2 million in sales, which represents a 69.4% increase in sales year over year (Nuomi is still relatively small and therefore has much more room to grow). Furthermore, Baidu (China’s dominant search engine) also maintains a large stake in Nuomi — which represents a huge vote of confidence. Nuomi can potentially become a highly lucrative business for Renren in the trillion dollar e-commerce industry.
- Major potential growth in the company’s Android gaming division.
- 194 million activated users, which represents a 20% year over year growth in activated users.
- Renren has no debt — an excellent management decision — and as a result, it must cover all of its expenses through its sales. This is the reason for Renren’s flat earnings. However, Renren is currently in the “growth” stage as it reinvests all of its sales back into the business — which will produce results for shareholders in the long term.
Analysts Anticipate Upward Momentum
Analysts at Jefferies Group upgraded shares of Renren from an “underperform” rating to a “hold” rating and now have a $3.30 price target on the stock.
Also, analysts at Bank of America Corp. reiterated a “neutral” rating on shares of Renren and now have a $3.90 price target on the stock, up previously from $3.50.
All the major Internet companies, including Renren, are making aggressive investments in mobile platform development to enhance their popularity on mobile devices due to the rapid trend towards mobile Internet being seen in China. Renren is bolstering its mobile apps, mobile commerce, mobile gaming and accelerating mobile advertising to enhance growth at the mobile channel.
It is not forecast for any significant revenue contribution from this growth strategy during the rest of 2013, but a successful implementation could accelerate revenue growth early in 2014,which fits in to the estimated time frame for today’s options trade.
Recommendation: Buy the RENN Apr 2014 $4.500 call (RENN140419C00004500) at or under $0.25, good for the day. Do not place a protective stop limit but execute a pre-determined sell at $0.50.
As of this writing, Ian Harvey did not hold a position in any of the aforementioned securities. Visit his site, stock-options-made-easy.com, for a wealth of information that will help you benefit from the exciting and lucrative world of options trading.