INTERNET – Ballooning Losses Slowly Killing Renren
Bottom line: Renren’s situation is likely to continue deteriorating as its core SNS business struggles and it sells off assets, with the company likely to close up shop or sell itself within the next 2 years.
During the last boom for Chinese Internet IPOs in late 2010 and early 2011, one of the last names to make a successful listing was money-losing social networking (SNS) leader Renren (NYSE: RENN), which billed itself as the Facebook (Nasdaq: FB) of China. More than 3 years later, the company is still losing money and the figure is starting to balloon, according to Renren’s just released quarterly earnings.
Somewhat surprisingly, Renren still has a market value of $1 billion, even as it shows every sign of becoming a bargain buy for an acquirer or going out of business completely. But this is China, and Internet stocks that normally wouldn’t get any attention from US investors can still get noticed when they carry the “made in China” label.
I’ve said before that Renren should try to sell itself to a rich investor like Alibaba (NYSE: BABA) or Tencent (HKEx: 700), which have far too much cash to spend and therefore don’t seem too concerned about the quality of their investments. But with each passing quarter, this failed Facebook imitator is losing more and more attractiveness. Soon it won’t be able to attract attention from anyone except for bargain hunters more interested in its assets rather than trying to save the company.
Renren’s top and bottom lines are both quite ugly, but nicely summarize the company’s downward spiral that seems destined to end with either its closure or acquisition. The company’s revenue tumbled 47 percent to a meager $22 million in the third quarter, equivalent to less than 1 percent of the $3.2 billion in third-quarter revenue posted by its role model Facebook. (company announcement)
The company said it expects its revenue to shrivel further to a meager $15-$17 million in the fourth quarter, representing a similar drop of 46-50 percent from the year earlier. The company’s net loss jumped 55 percent to $38 million, meaning its losses are now even bigger than its revenues — not a very good sign. Operating loss was even worse, ballooning nearly 4 fold to $96 million.
The only reason Renren’s net losses aren’t worse is because it’s slowly selling off any assets it has that are still worth anything. It recently sold off its online video service 56.com to Sohu.com (Nasdaq: SOHU) (previous post), and last year it sold its Nuomi group buying site to online search leader Baidu (Nasdaq: BIDU). The company still has nearly $150 million in cash and nearly $500 million in term deposits, which are probably its main remaining assets with any value.
Renren’s shares fell by 9 cents in after-hours trade after the results came out. But at its current levels, that small drop equated to a 3 percent decline in its share price. That price now stands at $2.96 per American Depositary Share (ADS), which is about one-fifth of what investors paid when the company’s shares were in big demand when it made its New York IPO in April 2011.
The company said it is undergoing a “challenging transition” in its results announcement, which seems like a huge understatement. At this point Renren is obviously a sinking ship, and it’s not clear at all if the company will be able to stay in business for too much longer at the current rate that it’s losing money.
From an investor’s perspective, Renren’s current valuation still looks far too rich for a company that has little or no long-term potential, and whose best value proposition may be as an acquisition target. But the fact that it’s selling smaller assets to raise cash means that Renren has probably also shopped around its main SNS unit but didn’t find any buyers. Accordingly, we can probably look for this company to keep posting bigger and bigger losses until it finally closes up shop, perhaps within the next 2 years.
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