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Shares of Renren (RENN) hit a new 52-week low ($2.71) last Friday, even after the company beat analyst estimates on both the top and bottom lines just a couple of weeks ago. So why are shares of Renren falling, and should investors start heading for the exits now? Let's take a look and see if the drop is truly justified.

When shares of a company hit a new 52-week low there is usually some sort of big news that comes with it. The news of course scares investors off which then creates panic, then before you know it a massive sell-off has already come to pass. Luckily for the remaining investors in Renren, this has not been the case. After stalking Renren day after day searching for the "big" news, longs should be glad that I came up empty and did not find anything outlandish. Because of this, I feel that the share price of Renren is not reflecting its true value and now represents a golden opportunity for investors to pick up shares at these undervalued levels. I mean how often do you get a company that's growing close to 50% year over year. Most companies throughout the world would love to be in the position that Renren is in now.

Renren's Rising Costs

Earnings season can be very chaotic time in that it usually makes or breaks companies and its investors. In Renren's case a lot of short sellers like to point out that Renren's rising costs in spending have single-handedly broken the company. Is this true? Looking at the share price of Renren it's hard not to say they were right. Renren's rising costs have been soaring the last couple of years and are toppling any revenue that Renren brings in, even with its growth rate of 50% year over year.

So why have Renren's costs soared? Renren is choosing to focus more on investing and building for its future, than trying to impress Wall Street with its numbers now. Instead of choosing to reduce costs and improve the bottom line now, Renren is focusing more on its future and is therefore spending in order to acquire a bigger share of the market, which in time will give them a bigger piece of the pie for future years.

Market share has become one of the top priorities for Chinese companies as hundreds of players are battling each other to gain an advantage over one another. Look no further then the battles currently going on between Baidu (BIDU), and Qihoo 360 (QIHU) in the search engine business. Up until now nobody has really taken on Baidu at its own games, that was of course until Qihoo came along with its own search engine that was launched back in August of 2012. Then we had Youku (YOKU) and Tudou (the Youtubes of China), which were battling each other to become the top spot in video website before finally merging the two companies last August. Youku Tudou now has close to 35% of the entire market in terms of its sales. Renren is also fending off companies like Sina (SINA), which runs popular blogging site Weibo and NetEase (NTES) which primarily engages in online games.

A great example of acquiring market share is what Amazon (AMZN) has done over the years. After years of poor bottom line numbers (which it still has) it has finally gained a huge share of the market now.

Because of the economic "slowdown" in China, advertising has been a challenge for many of these companies as well. Renren's challenges mainly consist of increased competition and the continuing shift of user's migrating to mobile. While Renren has seen some early signs of sentiment improvement toward China's macro conditions, it's still too early to tell how it will affect advertising in 2013.

What Investors Fail To Recognize

When a stock is setting new lows everybody likes to pass the blame around and call out the "mistakes" by management. However, when a glass is half-empty, the glass is still half-full. Investors need to realize that Renren is spending a ton of money to acquire a bigger market share, which in return will deliver bigger profits. Remember you have to spend money in order to make money.

Amazon is a great example of what I would like to compare Renren with. Amazon for the longest time didn't have the greatest margins and for the time being still doesn't. For years it spent as much as it could in order to acquire the market share it wanted and needed. Does this sound familiar at all to you with what Renren is trying to do? Hopefully what is taking place here is obvious to investors. The tables below gives us a look at Amazon's numbers from the past year as well as the forward guidance.

Earnings HistoryMar 12Jun 12Sep 12Dec 12
EPS Est0.070.02-0.080.28
EPS Actual0.280.01-0.600.21
Difference0.21-0.01-0.52-0.07
Surprise %300.00%-50.00%-650.00%-25.00%
EPS TrendsMar 13Jun 13Dec 13Dec 14
Current Estimate0.090.221.483.58
7 Days Ago0.090.221.483.58
30 Days Ago0.090.221.473.61
60 Days Ago0.100.221.463.64
90 Days Ago0.360.341.743.87

I find it very intriguing that investors have fallen in love with Amazon, which currently has a ridiculous Price-to-Earnings Ratio (P/E) of over 3,500, while most stocks are in the 10-35 P/E range. On the other hand we have Renren growing almost 50% year over year and it is doing the exact same things that Amazon is doing, yet for some reason Renren is getting punished for it.

Earning results

Even though Renren beat on last quarter's earnings, the market didn't take too kindly to the outlook Renren gave for its upcoming quarter and year. So what exactly did analysts and investors not like? First Renren's forecast for revenue's in the $44-$46 million range for the upcoming first quarter. Wall Street projected that Renren would be making around $47 million in the upcoming quarter. So the $44-$46 million range comes out to roughly a 4% decline from the top line in the fourth quarter.

Were analysts' estimates unrealistic for Renren? I say yes. I say this because Renren is one of the last Chinese companies to report its earnings in the earnings season. Almost every single Chinese company that had already reported earnings up to Renren's warned of a decline of some sort during the first quarter. It's a seasonal thing, not to mention the late start to the Chinese New Year didn't help things this year.

Baidu, often called the Google of China, set the tone last quarter when China's top search engine projected around a 5% decline in revenue for the upcoming quarter. Youku Tudou surprised investors with a forecast of a decline of around 20% for the upcoming quarter. Dangdang (DANG) didn't fair any better as it surprised investors with nearly an 8% decline forecast in its top line for its upcoming quarter. Looking back at Renren's forecast of a 4% decline in its top line isn't so bad now is it? I don't think so.

Conclusion

The last couple of years were huge investment years for Renren. Now the priorities for 2013 are clear and simple: to build the best user experience, explore mobile growth opportunities across business lines and to strengthen the existing monetization-centric businesses of gaming and group buying. Renren CEO Joseph Chen summed it up best when he said,

Given mobile is so important for our long-term growth, I think we will continue to invest relatively aggressively in mobile. But other than mobile for our other existing businesses, such as renren.com, such as Nuomi, such as 56, and the gaming itself is profitable. I think all the other 3 existing businesses will see a narrow loss. But however, we will continue to invest around $40-plus million in pure mobile-related initiatives. So with that, the total investment will be similar to last year's. But we think that's absolutely critical to secure our long-term growth, particularly in a mobile-centric world.

I feel that shares of Renren are a golden opportunity for investors right now and are worth another look. Renren has a very strong balance sheet with over $900 million in cash, no debt and is trading below book value. With a market cap of just $1 billion and with cash over $900 million, Renren is literally almost at cash value.

Balance Sheet
Total Cash (mrq):905.46M
Total Cash Per Share (mrq):2.40
Total Debt (mrq):0.00
Total Debt/Equity (mrq):N/A
Current Ratio (mrq):10.58
Book Value Per Share (mrq):2.93

Is Renren really only worth $100 million (Market Cap - Total Cash)? That would mean that nearly 90% of Renren's value can be explained by its cash on hand. Meanwhile its games, users, trademarks, etc are currently being valued at less than 10%. Does this seem right to you? I don't think so and feel that investors should take advantage of this golden opportunity to pick up shares of this highly undervalued company.

Disclaimer: Investors are reminded that this article should be considered general information and to make sure they do their own proper due diligence with regard to the stocks mentioned in this article. Have a great trading day and I look forward to all of your helpful comments and insight.

Source: Don't Miss This Golden Opportunity: Buy Renren Now