Seeking Alpha
Long/short equity, contrarian, research analyst, portfolio strategy
Profile| Send Message| ()  

Since my initial positive piece published on March 13, 2012, Renren: The Best Social Media Speculation, shares of Renren Inc (RENN), often dubbed the Facebook (FB) of China, are down more than 44%. However, I remain bullish on RENN.

RENN ChartRENN data by YCharts

Facebook IPO Disaster

One of the reasons why I was bullish RENN last year had to do with the hype surrounding the Facebook IPO. At the time, months before Facebook finally came to market, I believed that the company's anticipated valuation, nearly $100 billion, would have a positive effect on the whole sector and RENN in particular. Of course, this thesis was completely wrong. Facebook opened for trading at $45 per share on May 18, 2012, and then traded down for 4 months finally hitting bottom at $17.55 in early September. As shown by the chart below, the negativity around Facebook had an adverse effect on all social media stocks including names such as Groupon (GRPN) and Zynga (ZNGA).

FB ChartFB data by YCharts

Facebook Shares Recover

Since hitting bottom in early September, Facebook shares, as shown by the chart below, have staged something of a recovery. However, despite a more than 45% increase in Facebook shares, RENN shares have continued to trade lower. The rally in Facebook shares should be having a positive impact on RENN, but it has yet to occur. Sooner or later, investors are likely to realize that the future is not as dim as currently believed for RENN. I want to be long RENN before this happens.

FB ChartFB data by YCharts

Cash

Currently, RENN has $2.40 per share in cash and no debt. Given that the stock has recently been trading close to $3, the downside, in my opinion, is limited. At the time of my initial piece, I suggested that the downside for RENN was limited because they company, at that time, had $3.05 per share in cash. Of course, it also must be noted that at that time shares were trading close to $5. The distance between the stock price and cash was significantly greater than it is now.

Earnings Report

On March 11, 2013, RENN reported fourth quarter results:

  • $21.1 million or 6 cent per share loss for the quarter.
  • Revenue rose 49% to $48.8 million from $32.8 million a year ago.
  • Active user count increased 21% to 178 million.
  • Q1 revenue predicated between $44-$46 million.

On the conference call, RENN Founder & CEO Joseph Chen discussed the company's mobile transition:

2012 was a challenging and a crucial year here at our company. In addition to macro headwinds, we faced the challenge of navigating our business through the new mobile landscape of the Internet. It was a huge transition as we transformed our company DNA to adopt a new mobile-centric environment. We also had to make the important key decisions on focus and how to better position for shifting competitive environment. Mobile is now the industry-wide game-changer that creates a whole new sense of a playing field for Internet services, and I believe we have reached the important strategic junction of our journey to becoming a true mobile company.

As I have mentioned before, mobile is both an opportunity and a disruption. During the year, our exploration definitely had its trials and errors. For example, one of the mistakes we initially made was switching to HTML5 our Renren mobile applications. The quality of the user experience on H5 turned out to be less satisfactory, and we ended up migrating back to native apps.

I'm pleased that we made progress in several mobile developments. For example, we rapidly grow our mobile user traffic on Renren, and our overall user base continued to grow steadily despite intensifying competition. We drove significant revenues from mobile-related games, and we opened up a whole new dimension for mobile commerce on Nuomi. Now at this point in time, I feel good that our priorities and the strategies are focused, and I'm excited about our prospects for 2013.

Given the company's shift to the mobile market, I believe RENN is positioned to have a solid 2013. However, with RENN shares trading close to an all-time low, most investors do not appear to be giving RENN any credit for the transition. It should be noted that one of the major drivers of Facebook's recent recovery has been the impressive profitability of the mobile division.

Conclusion

Clearly, I was wrong with my previous bullishness regarding RENN. Not early, but flat out wrong. It would be nice for financial commentators, on all medium, including the internet and television, to take ownership when they were wrong. In this article, I have outlined the reasons why I am remaining bullish on RENN despite the abysmal price action since my initial mention.

Source: Renren Inc: Why I Remain Bullish