The past few months have seen a boom in social-media and Internet IPOs. LinkedIn
Renren made its debut on May 4 with an offering price of $14 and closed that day at $18.01. Since then, shares have lost 52% -- even after today's massive gains -- and I think this may be just the beginning. Since Day One, traders have been ignoring some subtle but dangerous red flags, and those factors may come home to roost in the form of considerably more downside in the stock.
Caution flag
Take, for example, the company's accounting irregularities just before its IPO. Fellow Fool Rick Munarriz expounded on this topic back in May, noting that there's a big difference between claiming 29% user-base growth and having to pull a 180 and change that figure to 19%.
Then there are the actual figures that need to be dissected: 117 million users with 31 million unique visitors. That's an impressive figure, but it pales in comparison with Facebook and its 600 million users. Where Renren really falls short is in its bottom line: $76.5 million in revenue last year and just a shade over $17 million in operating cash flow for a company valued at $3 billion is a bit excessive. Also consider where Renren is trading at in relation to its forward earnings projections. Currently at 283 times forward earnings -- that is not a typo -- the company dwarfs the previously expensive P/Es of Baidu
Did investors bother to even look at who Renren is competing against in China? Tencent, Kaixin001, QZone, 51.com, and SINA's Weibo are just a few of the names Renren is up against -- and this doesn't even include the likely prospect that Facebook makes a push into the Chinese social-media arena. Social-media consumers are fickle, and if Renren isn't careful, it could wind up a dinosaur like MySpace.
Do you Sohu?
Social-media alternatives to Renren do exist in China, and they don't have to be priced for perfection to make an impact in your portfolio. Recent "10 Mid Caps to Rule Them All" inductee Sohu.com
As for me, the downside in Renren appears considerably greater than the upside, even after a 52% tumble to its current valuation. I'd recommend keeping a safe distance from this social-media giant.
How would you place your bet on Renren's future? Share your comments below and consider adding Renren to your watchlist to keep up on the latest in the rapidly changing social-media sector.