Renren (Nasdaq:RENN) 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).� There�s even buzz that Facebook will team up with Baidu (Nasdaq:BIDU) 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� and his Twitter account is @ttaulli.� He does not own a position in any of the stocks named here.
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