Renren Inc. Earnings: Are Profits Gone Forever?

The Chinese Internet company has made big strategic moves, but red ink stretches as far as analysts can see.

May 19, 2014 at 10:45PM

On Wednesday, Renren (NYSE:RENN) will release its quarterly report, and investors aren't certain whether the Chinese social-networking company will be able to make money in the future. With the company having made a major sale to Baidu (NASDAQ:BIDU), Renren's remaining business hasn't been able to match the popularity of Facebook (NASDAQ:FB) in the U.S., and in fact, Renren has shown signs of contraction that could spell long-term trouble for Renren shareholders going forward.

At one point, bullish investors in China saw Renren as the emerging nation's answer to Facebook. With the seemingly limitless potential of the Internet in China, money poured into Renren. But the company has no longer found ways to grow, and Renren's recent strategic moves will hit overall revenue even further. Let's take an early look at what's been happening with Renren over the past quarter and what we're likely to see in its report.

China

Stats on Renren

Analyst EPS Estimate

($0.06)

Year-Ago EPS

($0.01)

Revenue Estimate

$25.49 million

Change From Year-Ago Revenue

(45%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Renren earnings ever recover?
Analysts have gotten more optimistic in recent months about Renren earnings, narrowing their first-quarter loss estimates almost by half and also reducing their expectations for losses by aboaut 20% for the full 2014 year. The stock, though, has gone nowhere, falling 4% since mid-February.

Renren's fourth-quarter results showed just how much difficulty the social-networking company has had finding business lately. Revenue plunged 29% compared to the year-ago quarter, and monthly active users dropped 20% in December even as gross margins fell by more than 17 percentage points. Moreover, Renren gave guidance for a 45% decline in sales in the first quarter, further alarming shareholders who had already seen substantial losses from the stock.

China

Of even greater concern is that Renren sold off one of its most promising businesses to Baidu back in January. Last year, Renren had sold a majority stake in its Nuomi group-buying service to Baidu for $160 million, and even at the time, analysts believed that Baidu would be interested in taking over Nuomi entirely as long as the business performed well. With the January sale of the remaining stake to Baidu, Renren no longer has the growth potential that Nuomi had given it, forcing it to rely on a core business that hasn't shown signs of much promise.

Meanwhile, Renren hasn't been able to duplicate Facebook's success. Losing 11 million monthly users in 2013 stands in stark contrast to the consistent growth Facebook has produced, and Facebook has also done a far better job at monetizing mobile content. Renren is still working to migrate its customer base off PCs onto mobile devices, and with so many other competitors in the market, it'll be hard for Renren to gain traction.

In the Renren earnings report, watch to see how the company expects to generate revenue without the interest that Nuomi generated. Without a solid strategy to drive traffic, Renren doesn't appear to have many options left for long-term survival.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends BMW, Baidu, and Facebook and owns shares of Baidu and Facebook. 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.

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