China's Facebook' Renren (RENN) Faceplants

Shares of Renren (RENN: Analysis), often hyped as the "Facebook (FB: Analysis) of China", slid at the end of last week after the largest social networking operator in China finished off a decent quarter with a bleak near-term outlook.

Daily Chart For its fourth quarter, Renren (literally meaning "everybody" or "all people"), posted a net loss of $21.1 million, down from a profit of $44.3 million in the prior year quarter. On an adjusted per share basis, Renren lost 6 cents per share, beating the pessimistic forecast by a penny. Revenue rose 49% to $48.8 million, topping the analyst consensus of $46.4 million - nearly completely driven by online game revenue. Renren attributed its lack or profitability to rising expenses in bandwidth and content, as well its lagging social e-commerce site Nuomi, a similar statement to the one it made in the third quarter when it reported similarly disappointing earnings. Nuomi, which is a group purchase site like Groupon (GRPN: Analysis), has suffered the same dire fate as its western rivals - rising revenue and a lack of profitability. In addition, its revenue from last year was boosted by a $51 million gain from its divestment from travel booking site eLong (LONG: Analysis), which made this quarter's numbers appear weaker than they actually were. Renren's internet value-added services, similar to Facebook currency, posted a 103.8% gain in revenue to $36.3 million. Advertising revenues from the site slid 16.7% to $12.5 million. Even worse, Renren's total expenses increased 84.2% to $17.8 million, which the company attributed to bandwidth costs, and content investments for its video streaming site, along with rising direct operating costs for released games. Research & development expenses to $25.5 million, which the company claims was caused by increasing the size of its workforce, heavier mobile-related investments. CEO Joseph Chen emphasized the importance of the company's mobile investments in games."We made progress in our mobile initiatives by rapidly growing our mobile traffic on Renren." He also stated that mobile games opened up a "whole new dimension" for the future of its struggling Nuomi segment, referring to micro-transactions, virtual purchases and digital downloads - all high margin products. For the full year, Renren lost $75 million, compared to a profit of $41.3 million in fiscal 2011. Meanwhile, revenue soared 49.3% to $176.1 million. Renren exhibits a major problem of fast-growing Internet stocks worldwide - fast revenue growth, out of control expenses, and a lack of profitability. These qualities can easily be used to describe any number of hot Internet stocks in America as well, such as Groupon and Zynga (ZNGA: Analysis). Simply put, Renren is not the Facebook of China. Whereas Facebook is profitable, Renren is a growing Internet company that is wearing too many hats - does it want to be a rival to Youku Tudou (YOKU: Analysis), also known as "China's Youtube?" Or is it trying to be the next Netease (NTES: Analysis) or Changyou (CYOU: Analysis) - and capitalize on the growing Chinese online game market? Or lastly, is it attempting to be the Groupon of China - in a crowded e-commerce marketplace dominated by Alibaba's Taobao? The company's strategy is scattered and it is simply trying to do too many things at once, as Yahoo (YHOO: Analysis) did in the early part of this decade. Such strategies are simply not sustainable, especially when the company is still unprofitable. Other News About RENN China's Renren is No Facebook China's Facebook is a weak imitator. Renren Books Q4 Loss of $21M Renren continues its streak of losses. Other Stocks in the News 3 Stocks to Buy in Times of 'Irrational Exuberance' Will these three stocks survive a stock market crash? Is Vera Bradley a Veritable Value? Is Vera Bradley's recent dip an attractive buying point? Copyright 2013 by, Inc. 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Published on Mar 19, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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