Are We There Yet, Renren?

If investors were hoping that Renren's (NYSE: RENN  ) latest quarterly report would be enough to get the Chinese social networking website back up to its IPO price of $14 -- or at the very least, return it to double digits -- they're out of luck.

The real-name network is growing quickly, but apparently not moving fast enough to justify its original $5.6 billion market cap, with the equivalent of roughly 400 million ADS outstanding.

Revenue in its latest quarter grew 53% to $30.4 million, fueled by a 94% surge in online advertising to $16.9 million. Web ads now make up more than half of Renren's revenue; the balance comprises online games, social commerce, and other value-added services.

The company's online advertising growth is impressive. Chinese online ad-sellers Baidu (Nasdaq: BIDU  ) and Sohu.com (Nasdaq: SOHU  ) didn't grow at that pace during the same period; their online ad revenue climbed 78% and 27%, respectively.

However, Renren's adjusted profit was more than halved to $2.3 million. Sure, Wall Street was settling for breakeven results on $29.5 million. One can also argue that Nuomi -- the social commerce initiative that Renren launched last summer -- is an early drag on performance. Back out Nuomi's costs and contributions, and adjusted net income actually grows by 23% during the quarter. However, it's not encouraging to see selling, marketing, and G&A costs grow twice as quickly as Renren's top line.

The market isn't happy with Renren's guidance for the current quarter. The company expects $33.5 million to $35.5 million in Q3 revenue. The 54% to 63% top-line spurt that this represents would translate into accelerating year-over-year growth, but analysts were already perched at the high end of that range with their target of $35.2 million.

They sure don't make China's dot-com darlings like they used to. Some of the past year's more ballyhooed IPOs in this sector -- video-streaming site Youku.com (NYSE: YOKU  ) , online retailer Dangdang (NYSE: DANG  ) , and Renren -- are either losing money or barely profitable.

Renren will get better. Once the scalable merits of its 124.2 million activated users kick in, margins will widen, and adjusted earnings will outpace top-line growth. As long as Renren doesn't yield the social networking crown to someone else, it will grow into a worthy dot-com darling.

Unfortunately, the company got cheated by its starting line. Baidu and SINA (Nasdaq: SINA  ) didn't go public as $5.6 billion companies. Sohu isn't even a $5.6 billion company now. Renren's shares will continue to drift lower until it finds a more reasonable valuation. Only then will Renren rise and fall based on its ongoing fundamentals. And we're not there yet.

Add Renren to My Watchlist to get the latest news updates on China's leading social networking site as they happen.

Motley Fool newsletter services have recommended buying shares of Sina, Sohu.com, and Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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..

Longtime Fool contributor Rick Munarriz has only been to China once, but he relishes admiring its dot-com revolution from afar. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On August 12, 2011, at 4:22 PM, Rennrunn wrote:

    Really Low valuation? Is that why it went up today? RENN has growth and will continue to grow. You touched up on the negatives but didn't mention many positives.

    1. first popcap games this quarter is bringing out plants vs. zombies for Renren. (huge profit online gaming)

    2. Jingwei.com the linkedin type site for renren is coming out of closed beta into open beta this quarter.

    3. the gaming division will grow as more games will come from 3rd party producers like popcap instead of in house games.

    4. Nuomi.com has been out only for one year and one month and is already making profit. groupon.com has been out for way more and has no profit. explain that to me how that is bad for nuomi in this type of group buying business?

    For writing an article on RENN you should do a little more research next time :) before you go short position on it.

  • Report this Comment On August 13, 2011, at 2:01 PM, prginww wrote:

    RENN is ready to grow with a fast pace, we need to face the truth for the revenue growth and potential of this china social network, if you are not there, you need to catch up sooner.

  • Report this Comment On August 14, 2011, at 8:55 AM, stocks3066 wrote:

    Down 60% since IPO and were looking for a reasonable validation? What are you thinking $2?? With the high growth rates I would assume were very close to the bottom? No? Why not?

  • Report this Comment On August 15, 2011, at 1:04 PM, fun2bretired wrote:

    Looking at Renren as a long term investment. And maybe it was price too high to begin with.

    Was Renren Oversold?

    http://www.associatedcontent.com/article/8163753/was_renren_...

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