Today, let's look at three things investors should be watching regarding Renren, as they'll provide us better insight into the company.
For the most part, China is still in its infancy in terms of Internet service growth. However, that doesn't mean there aren't a handful of competitors out there competing for the same slice of pie.
In the first quarter, Renren reported robust sales growth of 91% in its gaming segment. With gaming revenue now accounting for approximately 55% of total sales, it's imperative that Renren stay vigilant and innovative with online games, since there is no shortage of competitors. Currently, Renren is facing competition in China from SINA
For Renren to succeed, it'll need to realize it's not the only fish in the pond and it'll need to turn its attention to monetizing its games on mobile platforms. Renren did take its first steps in this direction recently by signing a pact with DeNA as well, so now it's just a matter of waiting to see if its actions prove fruitful.
2. Operating expenses
I understand that Renren needs to spend money to make money, but at some point there's going to need to be a tightening of the belt if it ever expects to be decisively profitable.
In spite of a 56% total revenue increase last quarter, operating expenses ballooned 90% as cost of revenue more than tripled. Renren is spending a lot on its infrastructure build-out in order to increase bandwidth and make the site more user-friendly. In addition, game development costs are beginning to rocket higher and are proving to be a margin-constraining crux on PC and console game developers worldwide.
Thankfully for shareholders, Renren has just over $1 billion in cash with no debt, giving the company a comfortable cushion to improve its consumer reach. However, keep an eye on this figure if it continues to wilt under the steep costs of game development and infrastructure improvements.
3. China's government regulation
Perhaps nothing threatens Internet service companies in China more, or places more question marks over their heads, than the regulations China's government can choose to impose.
The first rule of investing in China is to understand that the freedom of speech we're accustomed to in the U.S. is not present in China. Those fears materialized last week when Chinese officials announced a content crackdown on pornography and violence in the region, which sent online video content provider Tudou Holdings
Investors should understand that Renren could occasionally draw the ire of Chinese officials and need to be prepared to deal with the possible profit-crushing sanctions officials could impose on the company or sector as a whole.
Now that you know what to watch for, it should be easier to analyze Renren's successes and pitfalls in the future, and hopefully you'll gain a competitive investing edge.
If you're still craving even more info on Renren, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.
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Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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