Renren (RENN 0.23%), the Chinese social networking company once heralded as the "Facebook of China," sold most of its core businesses over the past three years. Its stock plunged from about $30 per share to penny stock territory, then finally dropped below $1 as the pandemic spread last year.

Renren's stock seemed destined to be delisted, but it rebounded to $10 per share back in February, then continued climbing to the mid-$20s earlier this month.

The main catalyst for that rally was the settlement of an investor-backed lawsuit, which started after Renren sold its most valuable investments in 2018. Desire to get a per-share payment from the settlement is generating a lot of buzz and causing investors to buy shares, ignoring the fact that Renren is just a husk of its former self. 

A person holding cash is showered by confetti.

Image source: Getty Images.

Reviewing Renren's transformation

Between 2011 and 2015, Renren's annual revenue plunged from $118 million to $41 million. Its core platform, which was essentially a clone of Facebook, struggled to compete against Tencent's QQ social network and its WeChat messaging app, and Weibo's microblogging platform.

However, Renren's revenue rose to $63 million in 2016 after it launched a new live-streaming video platform. Its revenue then soared to $202 million in 2017, with most of that gain coming from a new used-car sales platform. Its live video platform and investment portfolio, which included a 13% stake in online finance company SoFi (SOFI -2.68%) at the time, also continued to grow.

Why did Renren's share price plummet?

By the end of 2017, Renren's business had stabilized again. But in 2018, Renren sparked an investor revolt when it decided to sell its entire investment portfolio to Oak Pacific Investment -- a company controlled by Renren's CEO, Joseph Chen, and Japanese conglomerate SoftBank (SFTB.Y -1.04%) -- at a significant discount.

Renren closed the deal in June 2018 and paid $134.3 million in cash dividends, or $9.19 per American depositary share, to its retail investors. Only large investors were allowed to buy new stakes in Oak Pacific Investment. Five months later, Renren sold the remnants of its social networking business for a mere $20 million -- compared to its valuation of about $16.5 billion at the time of its IPO.

By the end of 2018, nearly all of Renren's revenue came from Kaixin Auto Holdings (KXIN), a newly established holding company for its auto business. But Kaixin struggled to grow in 2019 as China's economy stalled, and COVID-19 headwinds forced it to shut down its entire used car business in late 2020.

Renren's revenue declined from $458 million in 2018 to $350 million in 2019, then plummeted to $18 million in 2020.

The remnants of the company -- which mainly include two tiny SaaS companies in the U.S. -- are still unprofitable, and its stock looks ridiculously expensive at 33 times last year's sales.

Why did Renren's stock rally?

Renren looks like a zombie company, but a recent legal victory in a New York court brought a stampede of bulls back to its stock.

On Oct. 8, Renren agreed to settle a lawsuit with U.S. investors regarding the sale of its investment portfolio to Oak Pacific Investment. Oak Pacific Investment and Joseph Chen will pay out "at least" $300 million -- which might trickle down to $20 to $30 per share after legal fees -- to its minority shareholders and U.S. retail investors, according to a press release from lawyers representing those who sued.

Renren's stock had steadily risen over the past year in anticipation of that victory, but it skyrocketed from $17 to $25 after Reid Collins & Tsai, the law firm that represented the retail investors, confirmed the settlement.

Is Renren's stock still worth buying?

Investors might think it's a good idea to buy Renren right now and wait for the cash payments to flow in.

Yet Renren's stock price is already hovering near the midpoint of the rumored per-share payout range. Moreover, the judge hasn't formally approved the settlement, set a final price, or a scheduled the  payments yet, and it could take awhile for all those things to happen.

In the meantime, investors will be holding a stock which might be worth $20 to $30  -- but only because of its legal settlement instead of its underlying business. I believe it would be smarter to sell Renren in the mid-$20s right now and buy stock in companies that are actually growing.

Investors who shrewdly accumulated shares of Renren before the settlement was announced should take their profits and run, while other investors should simply avoid the stock.