It's Almost Game Over for Renren

Typically when companies forecast lower sales or profits, their stocks usually take a hit. It's not always easy to tell whether it's having a fire sale or burning down its house. Maybe it is time to get out -- or maybe it's time to buy more.

Investors have long been running away from Chinese social media darling Renren (RENN) and the guidance it issued the other day for its coming fourth quarter certainly did nothing to change that. While it forecast revenue of $45 million to $47 million for the quarter, representing growth of 37% to 43% over the year-ago period, it came in well under analyst expectations of $51 million.

Lately it seem Renren is fairly adept at predicting its revenue growth, as third-quarter revenue hit $50.4 million, right in the middle of the $49 million to $51 million range it gave three months ago. But that, too, was below what analysts anticipated, which suggests Wall Street has a too-rosy outlook on this company.

That the stock has lost more than 58% of its value from its 52-week highs should come as no surprise then, but don't blindly follow those selling (or buying): you still need to do some research. We'll just use the announcement as a jumping off point for a closer look.

Renren snapshot

Source: FinViz.com. N/A = not applicable; Renren doesn't pay a dividend.

If you build it, will they come?
What will Wall Street blame for Renren's continued weakness now that Facebook (META -10.56%) has seemingly stabilized (even if it hasn't turned into a growth stock yet)? I lampooned analysts who thought Renren's problems stemmed from those of its U.S. counterpart because they had similar business models. I pointed out that was absurd reasoning since there were plenty of reasons the problems of the one would have zero impact on the results of the other, not least of which was Facebook couldn't even be considered a competitor of Renren since it was banned in China.

I noted last month Renren seemed to be giving up on the social network experience and was instead trying to morph into an online gaming platform, and its quarterly results show revenue from that business now accounts for almost half of the total. Although it trumpets a 25% increase in its user base, the rate of growth is slowing.

In the second quarter, total activated users rose 30.5% from the year ago period. That slowed to 25.5% expansion this time around, and that's below the 33% jump it saw in last year's third-quarter period.

Like a general waging a multifaceted war, Renren has new competition in the form of NetEase.com (NASDAQ: NTES), Shanda Games (NASDAQ: GAME), and even Activision Blizzard (NASDAQ: ATVI), which distributes its games through NetEase. Renren also has to contend with Take-Two Interactive (TTWO 0.42%), which is also making an Asian play. On top of that, Renren's performing rearguard actions against SINA (SINA) and Tencent, which continue to strip away users from its social networking arena.

Costs and expenses are running away from Renren, far outpacing revenue growth as it finds it has to invest heavily to gain any ground in its new markets. As a result, losses widened from $1.2 million last year to $15.4 million this time around. With revenue growth sagging, even if its gaming business is growing (when you start from a negligible base your growth is naturally going to look awesome), Renren is spiraling down.

Running off the road
I've had a long-running underperform rating on Renren on Motley Fool CAPS, the 180,000-member investor community where informed opinion is translated into stock ratings of one to five stars. Renren's shares have tumbled more than 80% since I first weighed in a year and a half ago compared to a near 2% rise in the S&P 500. I'm going to maintain that CAPScall as I don't think the ruination of Renren is over yet, but tell me in the comments box below if you think the social-network-cum-game maker will still play out.