For many investors, earnings season can be a very rewarding or depressing time. When companies deliver their earnings reports, investors wait in anticipation of news that could send their shares popping or dropping.
Renren (RENN) investors must have felt pretty good after seeing Renren post a solid earnings beat. After all, Renren beat analyst expectations on both the top ($46.6 million vs 45.2 million) and bottom lines (-0.01 vs -0.07 EPS).
So what can investors take away from Renren's earnings report? Let's take a look at some of the positives as well as some of the challenges that Renren has going forward. Also I will give my recommendation on whether Renren is a buy, sell or a hold at this point.
I Knew Renren Would beat Earnings
Last week I published an article on Seeking Alpha titled Renren Earnings Preview: Why Company Will Beat Estimates Again. I showed the history of Renren's performance over the last year or so and what investors could look forward to in Renren's earnings. Below is the table that explains how I came up with conclusion that Renren would beat earning estimates.
* The numbers above represent values in the millions of dollars
As we can see from the table above, Renren has consecutively beaten the top line (revenue) for the last five quarters. Adding up the difference between all of the earnings reports we can see that Renren beats the top line by an average of $1.7 - $1.8 million. Wall Street predicted that Renren would have revenue in the $45.2 million range last Monday. Going off of my figures and what history has shown us, I expected that Renren would beat estimates again with revenue in the $46.9 million range.
I know what most of you are probably thinking right now. But revenue was $46.6 million not $46.9 million like I had predicted. Okay, okay so I was off by a little bit. The point is that I knew they would beat estimates, which they did.
Renren Misses On Guidance
Like I've shown already, Renren beats revenue expectations by an average of $1.7-$1.8 million. For the upcoming quarter Renren predicted revenue growth would be in the $55-$57 million range, well below what analysts expected in $61-$62 million. If we add in Renren's $1.7 million (what it usually beats by) then Renren would still come up more than $2 million short. That is of course if it hits even the top range of its forecast ($47 million).
Renren Earnings: The Good and The Bad
The Good: Renren had a first quarter loss of $3.2 million or one cent per share. Looking at last year's figures we see that they lost $13.6 million or 3 cents per share. So good news there.
Renren's Groupon like service Nuomi, had a great quarter as sales increased over 100% year-over-year and user metrics continue to be good. Nuomi reached 3.1 million active paying users and 54% of them were repeat customers. Nuomi's net revenue for the quarter was $5.1 million, representing a 102% increase year-over-year. That is quite impressive.
The bad: Renren continues its growth in users. Over the last year the user base grew 19%, from 154 million to 184 million. Not too shabby right. Unfortunately it is. Renren usually gains around 8-12 million users per quarter. This quarter Renren gained only 6 million users. As we can see, growth is slowing in this area as well as in its advertising area. Renren's games accounted for more than half of Renren's revenue. Renren is now becoming the Zynga (ZNGA) of China, not the Facebook (FB) of China like most thought. On a bright note at least, monthly unique login users reached 57 million, representing a 41% increase year over year.
Renren's guidance for the upcoming quarter was really disappointing after seeing this quarter's great numbers. Renren said it sees revenue for the next quarter between $55-$57 million, representing a 23% to 27% year-over-year growth. Much weaker than the $61-$62 million that analysts had projected. Because of the weaker than expected guidance, shares of Renren have fallen more than 10% since its pre earnings run.
Renren: Buy, Sell or Hold
So what have we learned from Renren? First of all is that it posted mixed results for investors. No matter how you look at it, the glass is half empty (bad earnings) or half full (great earnings).
So what have other Chinese stocks done with their recent earning reports? Baidu (BIDU) for the first time in a long time posted weaker than expected earnings. However, to soften the blow, the Chinese New Year, or Spring Festival, is China's longest festival, which is why the spring quarter has always been a slowdown period for most - if not all - Chinese companies. On a positive note, Dangdang (DANG) posted better than expected numbers and got an upgrade as well. Analysts at Bank of America initiated coverage on E-Commerce China Dangdang with a buy rating. The target price range for Dangdang is set at $7.
So what should investors do now? Well it really all depends on your time frame. If you are a short term investor looking to make a quick buck then Renren is not for you. However, if you are a long term investor than Renren's results will eventually pay off. Time is money so if you can afford to stick it out and wait a year for Renren to turn its investments profitable, then you are in a great spot. If you cannot wait a year or so, then you are in the wrong stock.
So what did I do? After Renren posted its earnings I wrote on the comments section of my article "Why Renren will beat estimates again" saying. "The company predicts that guidance for the next quarter will come in around $55-$57 million vs the streets estimates of $62 million. Usually RENN guides down $1-2 million but not $5-7 million lower. At those rates RENN will be growing 23-27% instead of the usual 40-50% rates like it has been accustomed to. Because of that I sold my position and do not currently hold a position in RENN."
I sold my shares over $3 and will look to get back in if or when shares hit the $2.50-$2.60 range. Investors are always reminded that before making any investment, you should do your own proper diligence on any stock mentioned in this article. Any material in this article should be considered general information, and not relied on as a formal investment recommendation. I look forward to hearing from you as well as any questions that you may have. Have a great day!