by Tony D’Altorio, Investment U Research
Thursday, May 12, 2011
Renren Inc. (NYSE: RENN), China’s leading real-name networking service, is the latest red-hot IPO to hit the market.
Though based in Beijing, it still isn’t listed in China. But it priced its initial 53.1 million U.S. shares at $14 each, the high end of the $12 to $14 it projected.
Renren raised $743 million from that IPO. Since it was the first social media company to go public, it drew a lot of interest from investors hungry to invest in such companies.
Next up should be LinkedIn. And of course, everyone is awaiting Facebook’s IPO, which won’t happen for another year at least.
In the meantime, analysts are touting Renren as “the Facebook of China.” And while the two companies do share certain similarities, they also differ in some important ways.
RenRen Adapts to Chinese Market – No Longer a Facebook Clone
Renren started out as a Facebook clone, but it adapted to the Chinese market. So the two services no longer mirror each other by any means.
Facebook operates an open platform where external developers can launch services. But as of right now, Renren has only accepted 1,000 of over 100,000 such applications.
It only welcomes that much to keep users off of other platforms. And while Renren has its own array of games, it makes its money very differently than Facebook.
Facebook has a much more advanced business model. It expands through daily deal initiatives, courting advertising agencies and the increasing array of uses for credits, its currency for virtual goods, of which it takes a 30 percent commission.
Renren, on the other hand, is still just starting out.
Its ads are much less targeted because China has less reliable data available. And advertising accounts for only 42 percent of its revenue; most come from its games.
Then there’s the fact that third parties get a lower revenue share on Renren than on Facebook. Though it might have it right there…
After all, Facebook doesn’t have much competition in the United States. But in China, Renren faces off with companies like Tencent Holdings (PINK: TCEHY), which operates the world’s largest instant messaging service and runs Pengyou, a real-name service.
Because of that fierce competition, Renren has a long way to go to match Facebook’s 500 million active users. Renren has just 31 million, even though it operates in the world’s most populous internet market.
Renren’s Investment Prospects
Renren’s revenue came in at just $77 million last year. Yet its post-IPO value puts it at nearly 100 times that!
Facebook’s shares in the private market can’t compete in that regard. Though it does have a much lower total enterprise value.
Renren has enormous potential growth among China’s 450 million internet users. That’s especially true since Facebook is still blocked in that enormous market.
Sumeet Jain, a partner with the venture capital firm CMEA Capital in San Francisco, says, “Looking at Renren, you see a company that’s in a huge market that still has lots of room to grow… So, it’s almost akin to saying, if you could invest in Facebook one year ago, would you have? Most would say ‘Yes.’”
But the fact that it operates in China should make investors pause. Jain even admits that, adding, “You’re already thinking about the risk of investing in China with the overarching government and regulatory bodies, and the exposure you have to not having full transparency of the business.”
Add that factor to the competitive landscape, and it’s no wonder that the Financial Times offered a less than glowing review of the company. It stated that Renren’s price-to-sales ratio is rich in relative terms, and well ahead of the 25 times implied by Goldman Sachs’ recent investment in Facebook. That’s also higher than 268 of the 269 U.S.-listed Chinese stocks that have reported comparable figures.
In other words, investors should do their due diligence before investing in Renren.