There's apparently more than a few differences between social networking in China and how it's playing out in the rest of the world.
Shares of Renren (NYSE:RENN) opened 4% lower this morning -- turning higher later in the day -- after capping off a strong quarter with a weak near-term outlook.
Revenue rose 49% to $48.8 million during the fourth quarter for China's leading social networking website operator. Renren's adjusted deficit checked in at $0.06 a share. Analysts were braced for a loss of $0.07 a share on just $46.4 million in revenue.
However, digging deeper into the performance shows how different Renren is from Facebook (NASDAQ:FB).
It's not just that Facebook is profitable and Renren is not. As mobile usage grows for both companies -- mobile is accounting for two-thirds of Renren's connections these days -- Facebook hasn't had a problem monetizing the platform on the smaller devices. Renren has struggled, and instead of traditional brand advertising, the Chinese speedster is turning to gaming and social e-commerce to cash in on the mobility trend. The end result is pretty shocking. Brand advertising revenue -- something that's up sharply at Facebook -- actually declined 17% at Renren over the past year.
Renren's revenue was up sharply largely on a 117% spike in online game revenue. Gaming now accounts for more than half of Renren's revenue, and that's a sharp contrast to Facebook where casual games are becoming less of a factor as it beefs up its platform for marketers.
There's a price to be paid when you're a social networking site diversifying your revenue streams away from your high-margin roots. Cost of revenue far outpaced revenue growth itself -- 84% vs. 49% -- as Renren invests in its Groupon-like Nuomi social commerce platform and its 56.com video-sharing hub. Facebook abandoned its foray into daily deals before it even went public, choosing instead to be a gateway for third-party merchants now via Facebook Gifts.
The market didn't like Renren's outlook, forecasting $44 million to $46 million in revenue for the current quarter. That's less than the $47.3 million that Wall Street was targeting and a 6% to 10% sequential decline from the fourth quarter's top line showing.
Analysts simply blew it this time. Nearly every single Chinese dot-com that has already reported has warned of a sequential dip during the first quarter. It's a seasonal thing, and the late start to the Chinese New Year is making things worse.
Market bellwether Baidu set the tone last month, when China's top search engine projected a 4% to 7% sequential revenue decline this quarter. Youku Tudou (UNKNOWN:YOKU.DL) -- China's leading video-sharing website, and an appropriate benchmark given Renren's push to take the company on through 56.com -- spooked investors with a forecasted sequential decline of 19% to 25% this quarter.
In other words, Renren's expected quarter-over-quarter decline of 8% at the midpoint of its range is perfectly reasonable. The 37% to 43% year-over-year growth is more than respectable.
Investors may want to hold back until Renren turns the corner of profitability or gets its brand advertising revenue moving in the right direction, but the busted IPO has already been marked down for those shortcomings.
Renren may be cheaper than you think right now.