Two words were enough to set the Renren (Nasdaq: RENN) hype machine in motion: China's Facebook.

A lack of profitability, its gargantuan proposed market cap, and the dicey nature of a social platform in China didn't get in the way of a smoking hot IPO. The American depository shares, which were originally pegged to be priced between $9 and $11 apiece, were eventually sold at $14.

It wasn't enough. Renren began its publicly traded life on Wednesday at $19.50, hitting an intraday high of $24.

It didn't last. The stock closed at $18.01 on Wednesday, meandering its way down to $16.80 by the end of the week.

The offering is a success on paper. The stateside shares are trading comfortably above the $14 price point that underwriters got their best accounts in on last week. However, Renren's pop falls well short of December debutantes (Nasdaq: YOKU) and E-Commerce China Dangdang (Nasdaq: DANG).

The stock's shaky start and lofty valuation are blurring the stratosphere. The unresolved market leadership in social networking in China also leaves Renren susceptible.

Stumbling at the starting gate
Renren runs China's leading real name social networking website, generating revenue from online advertising and from social gaming's virtual goods. It's growing at its revenue at a healthy clip, up 64% to $76.5 million last year. The bottom line is another story, but investors have been known to forgive near-term deficits if a story stock has potential.

Renren has that in droves. China is the world's most populous nation, and its online base of users recently surpassed the United States for the dot-com pole position. The economy's been growing at a roughly 10% rate over the past few years, hinting at growth that should be exponentially greater than similar situations in other countries.

The wild success of video-sharing website leader Youku and Web-based bookseller Dangdang six months ago opened the door for Renren. Neither company was a bottom-line darling. Youku is still losing gobs of money. Dangdang's net margins in the 1% to 2% range aren't that impressive. However, both companies were able to go public without any material setbacks. Renren wasn't as lucky.

Just days before the IPO, the head of Renren's audit committee had to step down over accusations of accounting irregularities at his own company. Ouch! Back in April, Renren had to revise its usage base growth claims lower after being called out on the matter.

There's also the company's odd corporate structure. Renren's a Cayman Islands-based holding company with only contractual rights to the economic benefits of the social network. A husband-and-wife team hold the majority stakes here.

Credibility killers like these would have sunk a weaker IPO, but not Renren. This is China's Facebook, right?

What's a Renren worth?
More than 117 million people have activated accounts. That's a cumulative number. The more reliable metric would be the 31 million unique monthly logins the company scored for the month of March.

Renren is obviously no Facebook and its global base of 600 million users. It doesn't have to be. If the valuation is fair, I'd be swan-diving into the stock. I'm not.

There are roughly 1.2 billion ordinary shares outstanding after the IPO and its successful over-allotment. Every ADS represents three ordinary shares, so we're talking about a company worth nearly $7 billion based on Friday's close. Renren would've turned a small profit last year if it wasn't for adjusting the value of its outstanding warrants, but we're still talking about a multiple of nearly 1,000 times last year's operating profit.

Bulls will point to Chinese dot-com darlings Baidu (Nasdaq: BIDU), SINA (Nasdaq: SINA), and (Nasdaq: SOHU) also fetching ridiculous multiples at first, but we're talking about entirely different starting lines. Baidu, SINA, and Sohu went public with eight- and nine-figure market caps. Renren's a debutante in the billions.

Facebook will go public valued in the tens of billions, but it will likely have earned it. It's still too close to call in China. Less than a tenth of China's Internet population logged into Renren during the March. There's still no clear dominant player.

SINA's Weibo -- a micro-blog blend of Facebook and Twitter -- is a rock star. Tencent's recent launch of QQ Login is a bold attempt for the leader in IM connectivity to take the next social step. Rumors have also been circulating for weeks that Facebook will team up with Baidu to see if China's Facebook may actually be a byproduct of Facebook itself.

We're desperate for social networking fireworks. Until Facebook goes public, investors will hope that Renren, Latino-targeting Quepasa (AMEX: QPSA), and the upcoming LinkedIn IPO will be Web 2.0 coattail rides. They'll forgive Renren's stiff valuation, Quepasa's paltry revenue, and LinkedIn's lousy engagement as long as they continue to grow in popularity.

Renren is an intriguing company, but it may take years before it justifies its current market cap. Sohu's profit of $139.3 million last year is nearly twice Renren's revenue -- yet Sohu commands a little more than half of Renren's current market cap.

Renren's like a snazzy suit that's several sizes too large. It looks good, but it's going to take a lot of growing before it truly fits.

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