When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Renren (Nasdaq: RENN ) , often referred to as China's version of Facebook (Nasdaq: FB ) , today, and see why you might want to buy, sell, or hold it.
With a market capitalization of about $1.7 billion recently, the stock has shrunk by roughly 40% over the past year. The company operates online games as well as a large social network. It sports about 150 million subscribers, compared with more than 900 million for Facebook.
One reason you might want to buy into Renren is that it sports some appealing numbers. In its last quarter, it posted a revenue gain of 56%, with gaming revenue surging 91%. To have any chance of sustainable earnings growth, you do need revenue growth. Analysts expect the company to be in the black by 2014.
Like fellow China-based online operators SINA (Nasdaq: SINA ) and Tencent Holdings, the company is also adding new revenue-generating premium features that subscribers have to pay to use. This may seem promising, but it remains to be seen what percentage of users will pony up for them.
More promising is the company's expansion into the mobile arena, such as through a deal with Japan's DeNa social-gaming specialist to bring more games to Renren's Android app. Renren is developing its own OS, and many are pleased that it's not repeating some of Facebook's errors.
While some worry that China's economic growth will slow and hurt companies operating there, a ray of hope emerged recently, when the nation's central bank lowered interest rates for the first time in four years, demonstrating a willingness to try to boost growth.
One word: competition. When it comes to China-based online gaming, for example, there's Sohu.com (Nasdaq: SOHU ) , which has posted some strong growth recently but has warned of a slowdown in China. Even Facebook itself could end up giving Renren a run for its money down the road. Mark Zuckerberg already visited China late last year and met with some potential partners there, such as Baidu (Nasdaq: BIDU ) and Alibaba.
Another big concern is China itself. The Chinese government isn't the biggest supporter of free expression online, and its restrictions have already caused Google to move its operations to Hong Kong and willingly give up some market share. It wouldn't be a huge surprise if the Chinese government decided that online networks were somehow a threat and took actions that impaired or wiped out the profitability of companies such as Renren. Already, The Wall Street Journal has reported that we can expect the government to have Internet companies crack down on unsuitable content.
Then there's the company's actual performance lately. The big jumps in revenue, for example, are promising, but that top-line growth didn't lead to great progress on the bottom line. Instead, profit margins shrank and the company posted a bigger-than-before net loss as operating expenses grew sharply. Meanwhile, revenue from advertising is not growing too briskly, at just 15% per the last quarterly report.
Given the pros and cons of Renren right now, it makes plenty of sense to just hold off. You might want to wait to see several quarters of net income instead of losses. You also might want to see how well the company is executing on its mobile strategy before getting more interested.
I think I'll be holding off on Renren, at least for now. After all, there are plenty of compelling stocks out there with more certain futures.
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