It's often said that people who can't bear seeing their stocks cut in half shouldn't buy any stocks at all. Some investors think that it takes time for a stock to fall over 50%, but those steep declines can happen within a very short time.
In a previous article, I reviewed why GoPro, Twilio, and Wuba.com were all cut in half in 2016. Today I'll add two Chinese tech stocks to that list -- Renren (NYSE:RENN) and 21Vianet (NASDAQ:VNET) -- which both lost more than half their value over the past 12 months.
Social networking site Renren was once called the "Facebook (NASDAQ:FB) of China". The similarities are obvious -- both sites started as social networks for colleges, and both networks use personal profiles and news feeds for sharing posts, photos, and videos. Renren initially benefited from Facebook being booted from China in 2009 after the Xinjiang riots, but its popularity quickly waned after newer platforms like Weibo and Tencent's WeChat entered the market.
Renren didn't invest heavily in O2O (online-to-offline) services, streaming video, or games to counter those rivals, and its platform soon became a dusty relic in the rapidly evolving social networking market. Its revenue growth stabilized as it displayed more ads and sold more value-added services to its 238 million "activated" mobile members, but its bottom line remains deep in the red. Analysts expect its revenue to rise 55% this year, but for its net losses to only narrow slightly.
To slim down, Renren sold off non-core businesses. In 2014, it sold its group purchase site Nuomi to Baidu, and sold its video website 56.com to Sohu. Last year, it decided to spin off its social video platform and most of its minority investments into a new subsidiary. Renren also diversified into online lending, but that market is a high-risk one which has been plagued by complaints about fraud. There's also persistent talk about Renren taking itself private -- which may benefit recent buyers but hurt investors who held the stock through its near-50% decline over the past 12 months.
Shares of Chinese data center company 21Vianet have tumbled nearly 60% over the past 12 months due to a multi-year streak of net losses. Analysts believe that 21Vianet's revenue will fall 5% this year as its bottom line remains deep in the red. That decline can be attributed to tough competition from bigger rivals and sluggish spending across the Chinese enterprise sector -- headwinds which also hurt top data center chipmaker Intel over the past year.
A series of moves also confused 21Vianet investors last year. First, the company received a privatization offer back in 2014 and sat on the idea until the deal was abruptly withdrawn last June. The deal was originally backed by an affiliate of state-backed conglomerate Tsinghua and software maker Kingsoft. 21Vianet then announced a $200 million share buyback plan and a new partnership with Tsinghua Unigroup, the conglomerate's tech arm, which previously privatized chip designers Spreadtrum and RDA Microelectronics.
That led some investors to believe that Tsinghua would eventually buy out 21Vianet to add its data center and cloud technologies to its growing portfolio of domestic and foreign tech companies. But Tsinghua didn't give any indication that it was interested, the buyout buzz faded, and investors went back to focusing on 21Vianet's dismal growth prospects instead.
The key lessons
Renren and 21Vianet's struggles teach us two key lessons. First, stocks can fall fast and hard without any real bottom line growth. Second, Chinese companies have a bad habit of trying to go private when things get tough -- which could burn shareholders who bought the stock at much higher prices. There are still plenty of attractive high-growth Chinese stocks out there -- but investors should steer clear of lemons like Renren and 21Vianet.
Leo Sun owns shares of Baidu, Twilio, Tencent, and Weibo. The Motley Fool owns shares of and recommends Baidu, Facebook, and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool recommends Intel, Sohu.com, Twilio, and Weibo. The Motley Fool has a disclosure policy.