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Investors are excited about social networking, but that basically means that they're excited about Facebook.
Face it. If it wasn't for Facebook and its roughly 600 million "friends," we'd be avoiding the entire sector the way a kid sidesteps spinach.
After all, what has social networking done for any other sites? News Corp. (Nasdaq: NWS ) is going to take a hit when it finally finds a buyer for MySpace. AOL (NYSE: AOL ) spent $850 million on Bebo and sold it two years later for $10 million. Anyone seen the Friendster folks around lately?
Social networking isn't hot. It's a sticky yet difficult-to-monetize niche. Facebook is the company that will command a market cap in the tens of billions when it goes public in the next year or two, but what's an investor to do until the IPO arrives?
Plenty. I have a few related companies that you can buy -- or short -- right now. Let's go over my picks and pans in this space.
2 to buy now
Let's take a look at two that I like now.
Google (Nasdaq: GOOG )
A lot of people don't know that Google owns Orkut, a social network that has failed to gain traction domestically but is very popular in Brazil and India. As the world's leader in online advertising, Google is likely to be a force in monetizing many non-Facebook social-networking sites above and beyond Orkut.
Google's valuation has never been cheaper, either. Big G is now fetching just 15 times this year's earnings and 13 times next year's projected profitability.
Former CEO Eric Schmidt recently confessed to missing the boat on Facebook. Didn't everybody?
T. Rowe Price (Nasdaq: TROW )
If you were expecting a regional social-networking darling to creep into this slot, I hate to disappoint you. There really isn't a whole lot to get excited about outside Facebook. The only potential winner is whatever Chinese Internet company that Facebook decides to team up with to roll into China. As we've learned from Google and any other outsider trying to make a mark in China, you don't succeed there unless you're partnering with a hometown darling.
What's a mutual fund manager doing here? Well, T. Rowe Price has been an aggressive venture capitalist, amassing stakes in Facebook, as well as other Web 2.0 darlings including Groupon, Twitter, Angie's List, and Zynga, and adding them to some of its technology and growth funds. We've seen how hot IPOs are popping, and T. Rowe Price is getting in early, to the benefit of its fund owners (and investors).
2 to sell
Now it's time to look at the investments that may be winners at some point, but not now. It's just too soon to hop on at the prices they offer.
Quepasa (AMEX: QPSA )
I'm getting very close to changing my tune on Quepasa. The price is getting better, shedding half of its value since peaking in January. The fundamentals are also getting better, with some healthy inroads in social gaming.
But for now, Quepasa still isn't worth its market cap of $134 million.
Quepasa continues to lose money, and more than $2 million of the $2.2 million in revenue it scored in its latest quarter came through an advertising deal with a sponsor affiliated with one of its board members.
The company's metrics also aren't as rosy as they may sound. There are now 37.5 million cumulative registered users, but only a sliver of them are still around. Quepasa claims that repeat visitors go through an average of 29.8 pages, and it served up 230.9 million pages to 16.3 million unique visitors in May. Right off the bat, one should be troubled that this is a sequential dip from the 245.8 million pages it produced in April. Unique visitors and pages viewed per repeat visitor also slipped.
Now let's work the cruel engagement math. How many "return site" visitors is Quepasa actually collecting? Divide 230.9 million pages by 29.8 pages, and we get 7.7 million repeat users, but that would only mean they came back once all month long. We would also have to subtract the balance of the 16.3 million who either followed a link to the site and moved on or registered and never came back. My guess is that we're talking about a regular user base in the hundreds of thousands.
Quepasa did roll out a Zynga-esque game, Wonderful City - Rio, last month. That could be a catalyst for Quepasa if sequential traffic continues to slip this month, although most of the 1.3 million game installs are likely to be on Google's Orkut in Brazil rather than on its own site.
Renren (NYSE: RENN )
China's Renren is in a much better place than Quepasa is. Revenue climbed 64% to $76.5 million last year, and it would've squeezed out a small profit if it not for adjusting the value of its outstanding warrants. There were 117 million cumulative registrations through the end of March, with 31 million unique logins that month.
Renren went public last month at $14, traded as high as $24, and is now back well below $14. I think there are a lot of values to sift through, given China's many busted IPOs, but Renren isn't one of them. Even after this week's continuing meltdown, Renren is fetching an unrealistic valuation of nearly $4 billion.
This one's falling to a level that I might be interested in it as well, as long as its fundamentals hold up. After all, it's still premature to call this China's Facebook when it has less than 3% of the mammoth country's population as monthly regulars. This is a very fluid situation in a very restrictive country.
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