Renren (NYSE: RENN), the Chinese social networking company, recently reported fourth-quarter results with an astounding jump in net income of $44.3 million, compared to a loss of $33.9 million in the previous year's quarter.
However, the profit was mainly due to gains from selling its stake in eLong (Nasdaq: LONG), a Chinese online travel service provider, to Expedia (Nasdaq: EXPE) for $72.4 million. So is Renren still a good investment? I have reason to think so.
Milking the mobile user
Renren's users are increasingly accessing their accounts through mobile devices. In the fourth quarter, these accounted for 38% of its user base. Currently, Renren only makes money through games for mobile devices, but it's now looking to fully monetize this traffic. If Renren starts advertising on its mobile platform successfully, this would certainly translate into higher revenue.
The plan is to integrate Renren.com and its daily deals site Nuomi.com (much like Groupon), along with its location-based services. How will this work? By combining information on daily deals with a user's location, Renren hopes to offer more relevant and viable deals in the person's vicinity.
If you have read one of my earlier articles on Groupon (Nasdaq: GRPN), you know that I'm skeptical of its business model, primarily because the user base is flimsy and requires regular investment to hold on to.
On the other hand, this is not entirely true for Renren because it already has a ready user base from its social networking site to which it can sell appropriate daily deals -- a setup somewhat better than Groupon's, but I'm not totally convinced. I would keep a close eye on this development, given the soaring use of smartphones and tablets.
Nevertheless, Renren's opportunity for growth does not come without a few hiccups.
The great firewall of China
Heavy censorship imposed by the Chinese government, coupled with competition from other aggressive players with huge marketing budgets, has made it difficult for Renren to turn a profit. Rival SINA's (Nasdaq: SINA) microblogging platform, dubbed Weibo, has significant presence in the Chinese social-networking space.
China's display ad market is particularly fragmented. And even though SINA is one of the largest Internet companies in China, it only has a market share of 7% in display ads. SINA is among those Chinese companies that will benefit from the integration into Apple's Mountain Lion OS, while Renren wasn't included.
The Foolish bottom line
If Renren can profit from the habit of users accessing its services on the go, as well as from the consistent user base for its daily deals site, the company may well be able to grow its top and bottom lines. What's more? The company is also a lot less risky, as it is debt-free.
Sound interesting? Then you can stay up to speed with all the action by adding Renren to your watchlist. It's free and lets you stay on top of the latest news and analysis for your favorite companies.
