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Renren (RENN) operates several business units, including online advertising, online video advertising, online gaming, group buying, and other internet value-add-services. Each unit generates a specific revenue stream. Using the Sum-of-The-Parts analysis, I derived the fair value of Renren’s stock price to be $4.58 per share (+22% above closing price on November 23rd) based on the estimated revenue for 2012.

EV/Revenue multiples assumptions are based on a range extracted from each unit’s respective peers (See table)

Business Unit

Comparable

Forward EV/Revenue

Online advertising

Sina (SINA)

6.0x

Sohu (SOHU)

1.0x

56.com

Youku (YOKU)

4.5x

Tudou (TUDO)

0.3x

Online game

Tencent

6.0x

Shanda Games (GAME)

0.8x

Nuomi

Groupon (GRPN)

5.4x

Other IVAS

SkyMobi (MOBI)

0.2x

For online advertising, I applied an 8x multiple because the online advertising unit is expected to grow twice as fast as the industry average. For the “Bear Case”, 1x multiple is applied to assume that it grows on par with the industry average.

I applied an 2.5x “Bull Case” multiple for 56.com as Renren attempts to monetize the UGC site. Renren could leverage its user base, which is larger than Tudou, to generate online ad revenue. For the “Bear Case”, 0.3x multiple is applied to assume that 56.com will be as underperforming as Tudou.

Renren’s social networking games are comparable to that of Tencent, but the unit lacks the dominance that Tencent enjoys, so a conservative 3.0x multiple is applied for the “Bull Case”. For the “Bear Case”, 1x multiple is applied, assuming that the unit is on par with Shanda Games.

While Nuomi could be one of well-recognized group buying sites in China, the unit does not deserve the same multiple that is applied to Groupon. A generous 3.5x multiple is applied for the “Bull Case”, assuming that it scales up its geographic presence and segmentation, while a 0.5x multiple is applied for the “Bear Case”, assuming that the unit fails to increase its scale and continues to be unprofitable.

For Other IVAS (excluding online game), the “Bull Case” multiple is assumed to be 1x, while the “Bear Case” multiple is assumed to be 0.2x, which is on par with that of SkyMobi.

The “Bull Case” derived a price target of $5.76 and the “Bear Case” derived a price target of $3.36, representing a 54% upside and a 10% downside, respectively. The “Base Case” is the midpoint of the “Bull Case” and “Bear Case”, and has a price target of $4.56 per share, or a 22% upside.

Source: Valuing Renren Using Sum-of-The-Parts Model