Why Renren Earnings Are Stuck in the Red

Renren (RENN) will release its quarterly report on Wednesday, and investors have gotten excited about the Chinese Internet stock lately, pushing its share price up sharply in the past six weeks. Yet Renren earnings remain squarely in the loss column, and it's uncertain when the company will be able to become profitable.

Renren jumped onto the social-networking bandwagon in China, with many hopeful investors comparing the company to Facebook (META 0.55%). Yet while Facebook has found ways to boost its profitability since coming public, rekindling interest in its long-lagging stock, Renren still has a lot of work to do to convince investors that it can consistently make money. Let's take an early look at what's been happening with Renren over the past quarter and what we're likely to see in its quarterly report.

Stats on Renren

Source: Yahoo! Finance.

How can Renren earnings improve?
Analysts have had mixed views in recent months about prospects for Renren earnings, widening their June-quarter loss estimates by $0.01 per share but narrowing their full-year loss projections by $0.03 per share. The stock has jumped sharply recently, with gains of 27% since early May.

Renren is certainly doing its best to attract business. In its first-quarter results, the company managed to boost its sales by 41%, with revenue more than doubling for its daily deals business, Nuomi. But unlike Facebook, which has largely moved to an advertising-based model to boost its own monetization efforts, Renren has largely stuck with social gaming, which makes up more than half the company's total revenue. Yet with the company having given guidance for the June quarter that was below what analysts had hoped to see, Renren still has a long way to go to turn its audience into cold, hard cash for investors.

Unfortunately, though, Renren has already warned that second-quarter revenue would come in still lower than its initial guidance. The company said late last month that "delays in our game pipeline" would cost it roughly 10% of its expected sales.

The real key for investors to understand about China, though, is that handy comparisons of Chinese Internet companies to U.S. counterparts can be misleading. Calling Renren "China's Facebook" makes it seem as though there's only one social-media platform worth worrying about, but the competitive framework is far more fluid than that. For instance, up-and-coming YY (YY -1.51%) also operates a social-media platform with access to social groups and activities, including an online-game media site. Moreover, many well-established Chinese Internet players have sought to encroach on territory that other companies have claimed, with Internet-security company Qihoo 360's muscling in on Baidu's search-engine business being the most obvious example.

In the Renren earnings report, watch for the company to detail its strategy for getting its sales back up and trying to hasten its monetization activities. With intense competition, Renren is running out of time to get to profitability before its rivals make it a permanent also-ran.

Click here to add Renren to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.