Renren (Nasdaq: RENN ) is called the "Facebook of China." So it should be
no surprise that its initial public offering has been red-hot. On Wednesday,
Renren issued 53.1 million shares at $14 each. In early morning trading, the
shares hit $20.79, up 39%. Like Facebook, Renren got its start in China's
university system. It was a great way to quickly build a community. By late
2007, Renren opened the site to the general public. The main target is now
young urban professionals. No doubt, this is an attractive demographic for
advertisers. But is Renren a good investment? Let's take a look at the pros
and cons: Pros China 's top social network. Renren has roughly 117 million
users, and it has access to Facebook-like features, including news feed updates,
instant messaging, photo sharing, games, music downloads, and videos. Renren
also has built other social networking sites. For example, nuomi.com is for
social commerce and jingwei.com is focused on business purposes, similar to
LinkedIn. Strong growth. Renren is adding about 2 million activated users each
month. The engagement also is high. On average, users spend about seven
hours on the platform every month month. Network effect. This is a powerful
concept. As a social network gets larger, it should attract even more users,
since its the "in" place. This virtuous cycle creates lots of velocity in
user traction and makes it extremely difficult for competitors to keep up.
Also, as users put more of their information on a social network, it gets more
costly to move elsewhere. Cons Fickle consumers. So far, Renren has done an
excellent job in evolving its platform and keeping it relevant. But this is
extremely hard to keep up. As seen with sites like MySpace and Friendster,
user enthusiasm may diminish. And when this happens, the consequences can be
severe. Competition. Renren faces tough rivals. And as the company expands
into unfamiliar areas, it will further increase the competitive pressures. If
not executed right, the company could get distracted and experience a falloff in
growth. Just some of the rivals include Tencent, kaixin001.com and Sina (NASDAQ:
SINA ). There's even buzz that Facebook will team up with Baidu (Nasdaq:
BIDU ) to get a piece of the Chinese social networking market. Accounting
issues. Just a few weeks ago, Renren's prospectus indicated that its
monthly user base grew by 29%. Well, it was a typo. The real number was 19%.
What's more, Renren's chairman of the audit committee, Derek Palaschuk,
resigned a few days before the offering. He is the CFO of another company that
is being accused of an accounting scandal. Verdict Renren says it has a
"geek" culture, which is constantly striving to innovate. For example, the
company recently launched a check-in system, in which users can indicate their
locations. There are also plans to launch mobile games. Renren is also having
much success with monetizing its user base. A key is its use of "social
ads." These allow advertisers to target users based on interests, which are
based on the interactions on the site. Often, the conversion rates are higher
than typical banner ads. But the fact is that Renren is trading at an extreme
valuation of over 100 times its 2010 revenue. And of course, the competitive
pressures are serious. In light of the risks, the cons outweigh the cons on the
stock. Tom Taulli's latest book is " All About Short Selling " and his
Twitter account is @ttaulli . He does not own a position in any of the stocks
named here.
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