This Stock Is Down 52%, and That May Be Just the Beginning

The past few months have seen a boom in social-media and Internet IPOs. LinkedIn (NYSE: LNKD  ) , Pandora Media (NYSE: P  ) , and Youku.com (NYSE: YOKU  ) , to name a few, all shot out of the gate from their respective IPO list prices. But recent sentiment on social-media companies is beginning to cool off. LinkedIn dipped as low as $60 after hitting a high of $122 on its first day of trading, while Youku now trades at $33 after coming within pennies of $70. For no company has this trend been more apparent than for Chinese social-media upstart Renren (NYSE: RENN  ) .

Renren made its debut on May 4 with an offering price of $14 and closed that day at $18.01. Since then, shares have lost 52% -- even after today's massive gains -- and I think this may be just the beginning. Since Day One, traders have been ignoring some subtle but dangerous red flags, and those factors may come home to roost in the form of considerably more downside in the stock.

Caution flag
Take, for example, the company's accounting irregularities just before its IPO. Fellow Fool Rick Munarriz expounded on this topic back in May, noting that there's a big difference between claiming 29% user-base growth and having to pull a 180 and change that figure to 19%.

Then there are the actual figures that need to be dissected: 117 million users with 31 million unique visitors. That's an impressive figure, but it pales in comparison with Facebook and its 600 million users. Where Renren really falls short is in its bottom line: $76.5 million in revenue last year and just a shade over $17 million in operating cash flow for a company valued at $3 billion is a bit excessive. Also consider where Renren is trading at in relation to its forward earnings projections. Currently at 283 times forward earnings -- that is not a typo -- the company dwarfs the previously expensive P/Es of Baidu (Nasdaq: BIDU  ) at 34 and SINA (Nasdaq: SINA  ) at 54.

Did investors bother to even look at who Renren is competing against in China? Tencent, Kaixin001, QZone, 51.com, and SINA's Weibo are just a few of the names Renren is up against -- and this doesn't even include the likely prospect that Facebook makes a push into the Chinese social-media arena. Social-media consumers are fickle, and if Renren isn't careful, it could wind up a dinosaur like MySpace.

Do you Sohu?
Social-media alternatives to Renren do exist in China, and they don't have to be priced for perfection to make an impact in your portfolio. Recent "10 Mid Caps to Rule Them All" inductee Sohu.com (Nasdaq: SOHU  ) comes to mind. The company has produced 17 times the operating cash flow of Renren over the trailing 12 months, holds $21 per share in cash with zero debt, and trades at 13 times forward earnings -- compare that with the frothy figure we looked for Renren. Now look at the valuation on each company and try your best to stop your jaw from hitting the floor: Renren's market cap is 20% higher than Sohu's. If you can explain how that's possible, then perhaps you should be in politics.

As for me, the downside in Renren appears considerably greater than the upside, even after a 52% tumble to its current valuation. I'd recommend keeping a safe distance from this social-media giant.

How would you place your bet on Renren's future? Share your comments below and consider adding Renren to your watchlist to keep up on the latest in the rapidly changing social-media sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Sohu.com, SINA, and Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that'll never unfriend you.


Read/Post Comments (7) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2011, at 10:02 PM, Rennrunn wrote:

    I understand the position of being cautious but what was failed to be mentioned was the differences between facebook , sohu, etc.

    Renn has 2 distinct differences from the others. First is Jinguei which is like a "linkedin" version of China. Then it has Nueomei which is being increased this quarter in investment. " nueomei is a groupon like site for China. Is there competition in this space sure there is.

    But what everyone fails to see is that this company has good long term growth and considering how low this stock is you can clearly see why the volume has been gaining traction everyday even though people have been trying to short the stock.

    122 milion users is nowhere near 600 million that facebook has but facebook has a different business model in terms of revenue. Facebook makes it profits from adds only as revenue. Renn makes profits from its online gaming, advertising, and nueomi(groupon like site). Imo Renn will turn out to be the better investment but time will tell for sure.

  • Report this Comment On June 29, 2011, at 11:53 PM, hudson345 wrote:

    RENN has had a 3 day run to the upside. Your timing to write this article is very suspicious. You laid out no facts about the company but a prediction of doom.

    I feel with RENN'S Facebook and Groupon like business model along with gaming etc RENN will be a winner.

  • Report this Comment On June 30, 2011, at 1:57 AM, mithcmr wrote:

    "Motley Fool newsletter services have recommended buying shares of Sohu.com, SINA, and Baidu."

    Got it. So, the true purpose of your very slanted and incomplete analysis is to pump Sohu.com, SINA, and Baidu at the expense of RENN.

    Or, to put it more correctly, you're concerned that a continued run-up in RENN will pull investors away from Sohu.com, SINA, and Baidu.

    You're probably right and for good reason. RENN clearly could overtake them all in the next few years.

    Good luck. Employee loyalty is important. Just make sure you're being honest with yourself and others along the way.

  • Report this Comment On June 30, 2011, at 10:05 AM, methodmass wrote:

    Awful artice. Plain and simple.

  • Report this Comment On July 01, 2011, at 12:52 AM, flounderuiuc wrote:

    Pump and dump

  • Report this Comment On July 01, 2011, at 11:44 AM, boblone19 wrote:

    Sina is doing "weibo" apps development in university of China.

    latest news,

    http://open.weibo.com/contest/index.php

    if u could read chinese.

    BIDU is doing online translate service.

    http://fanyi.baidu.com/translate

    update 2011.7.1

  • Report this Comment On July 01, 2011, at 11:56 AM, boblone19 wrote:

    if ppl really wanna invest SINA, they should go to http://weibo.com/ register u own weibo, play around little bit.

    from what i know, weibo is popular because lot of movie star, famous singer have been register.

    ppl in china like weibo not only use it to see latest news from friends but also gossip from star too.

    nowdays, i found some of media copy news from weibo, such as newspaper, Tv... and so on.

    i wish they could have english version weibo soon, so i could study more about weibo and chinese lifestle.

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