Why Renren Shares Could Double On The Heels Of The Facebook IPO

 |  About: Renren Inc. (RENN), Includes: BIDU, FB, GRPN, LNKD, TUDO, ZNGA
by: Trade In Mexico

Renren, Inc. (NYSE:RENN) operates a social networking website, which has led some investors to think of it as the Facebook (NASDAQ:FB) of China. However, there is more to this company, and as one recent article points out, Renren could be considered the Zynga (NASDAQ:ZNGA), YouTube, and Groupon (NASDAQ:GRPN) of China as well.

Renren operates a few of the most popular websites in China, and is poised to benefit from the growth in population and Internet usage in that country. Since Renren has so many high-growth businesses, this stock could become one of the best stocks to buy and hold over the next few years. Plus, it's now possible to buy Renren at less than half of the $14 share price it was initially offered at when it went public in May 2011. When Renren went public it was red-hot, surging to over $20 per share on the same day of the IPO. Even though the company has a cash-rich balance sheet and growth rates of over 50%, some short-sighted investors have been willing to sell their shares cheap.

However, the Facebook IPO is renewing interest in Renren, as is the performance of LinkedIn (NYSE:LNKD) and Tudou (NASDAQ:TUDO) shares. Both Facebook and LinkedIn show how high valuation metrics can go once a stock gets traction and both momentum and growth investors pile in, which creates a recipe for huge gains. I remember when U.S. investors did not pay much attention to Baidu (NASDAQ:BIDU), and it too fell below its IPO price. But now the shares are up more than tenfold from the lows, and investors take the company and its stock very seriously. The same might happen to Renren, and it could be poised to gain significant exposure in the days before and after the Facebook IPO. Here's why:

Many analysts expect the Facebook IPO will value the company at about $100 billion, and many investment experts believe the stock could double from even that lofty level. "Fast Money: traders on CNBC state:

On Thursday, Facebook priced its initial public offering between $28 and $35 a share. 'I think the stock could double -- it could be crazy,' says Grasso. 'There's that much buzz that people are going to trip over themselves to get in.' Top hedge fund manager Anthony Scaramucci says much the same. 'There's a lot of interest in this stock. I agree that a whole train of investors will pile on in the first few days.'

Another article analyzing the potential gains on the day of Facebook's IPO states:

It's possible that Facebook will insist that some retail investors be given entree into the IPO, but since the deal is expected to be managed by Morgan Stanley, with Goldman Sachs sniffing around on the periphery, there's no chance that the opportunity will be anything other than window dressing. Yes, it's conceivable that Facebook shares will open at, say, $100, soar to $500 in a year, or a month, or a day, and never look back.

The Facebook IPO is likely to be different than any other because this company has become a daily, or even hourly, habit for many consumers to spend time on. With hundreds of millions of registered users, a good number of them might be wanting and willing to buy Facebook shares, regardless of the price-to-earnings ratios or other normal valuation metrics. Furthermore, this IPO is poised to possibly be the most widely covered by the media. The media is likely to also cover other stocks in this space such as Renren and LinkedIn on the day of the IPO and thereafter. The social networking industry is still in its infancy, and Renren is one of the only ways to buy into this sector for less than half the IPO price.

If Facebook shares surge after the IPO as the articles and analysts predict above, it could easily help take Renren shares back to around the IPO price of $14 per share, or maybe even higher, in the coming weeks. The fundamentals support a much higher stock price because Renren has a market capitalization of just about $2.4 billion. Furthermore, it has over $1 billion in cash on the balance sheet, which is equivalent to about $2.64 cents per share. That means this leading social networking and Internet company is trading for just over $3 per share, when you back out the cash. This gives Renren a enterprise value of only about $1.48 billion, which looks incredibly cheap when you consider that Facebook is likely to be valued for more than 60 times that level.

When taking a closer look at LinkedIn, Renren once again looks deeply undervalued. LinkedIn operates a popular networking website used by professionals to stay in touch and exchange business and job opportunities. LinkedIn shares have performed well, and it shows that more than one Internet networking company can succeed and make lots of money for shareholders. It also shows how high valuations can go in this sector, as it trades for about 165 times earnings. LinkedIn is growing at about the same rate as Renren, and it is a larger business by a factor of about 4, but it has an enterprise value that is almost 8 times more than Renren.

Tudou Holdings has a video website in China, similar to YouTube and similar to Renren's 56.com site. This was another stock that investors ignored, and shares were trading for about $12.50 in March and even lower before that until another Chinese company offered to buy it. This allowed the shares to triple in value in just a few days, over 300%. Furthermore, many analysts expect that more mergers and acquisitions with Chinese companies are possible in the future because it is one way to add growth cheaply. Renren is an ideal candidate for a takeover from a larger Internet company. It has a video-sharing site similar to Tudou's, it has a networking site similar to Facebook and LinkedIn, and it has a coupon and daily deals site similar to Groupon. It also offers games like Zynga. Plus, Renren is planning to capitalize on the rapid growth of mobile Internet. The company's CEO, Joseph Chen, was recently quoted in a CNBC article:

'We are going through a sea change right now. The sea change is mobile internet,' said Joseph Chen, the founder of the company, in an interview. Chen told CNBC more than 200 million smartphones are expected to be sold in China this year and the company planned to invest heavily in the mobile space.

If you consider that 200 million smartphones could be sold in China just this year alone, the growth potential is enormous. To give you an idea of how many phones that is, just think about the fact that the total population in the U.S. is only about 313 million.

To summarize, Renren is deeply undervalued and its growth potential has not yet been grasped by the markets. The Facebook IPO could be the catalyst that brings the type of investor focus that allowed Renren shares to trade for over $20 on the day of its IPO about a year ago. Renren's core business is profitable, but the company is reinvesting profits wisely in future growth. That is similar to the model other highly successful, early-stage companies like Amazon.com (NASDAQ:AMZN) employed. Renren achieved revenue growth of about 56% in 2011, and the company is buying back its own shares. In late 2011, the company announced a program to repurchase up to $150 million of its shares. As of Dec. 31, 2011, it had repurchased 6,089,228 shares at a total cost of about $25.6 million. This means more share purchases are likely, and this can boost future returns for shareholders. Furthermore, the company expects 50% to 55% growth in 2012. Renren is worth buying based on its own merits and because of the undervaluation, but the Facebook IPO is what could take this stock to levels that few imagine possible now. Few companies offer all the positives that Renren does:

  1. Rapid revenue growth of over 50%.
  2. A stock so undervalued that the company is buying back a significant number of shares.
  3. A business model that is poised to benefit from the growth of social networking, videos, mobile Internet and China.
  4. A fortress-like balance sheet with over $1 billion in cash and no debt.
  5. The potential for a takeover offer similar to what Tudou recently experienced, which resulted in gains of over 300% in a matter of days.
  6. Renren has more cash on its balance sheet than LinkedIn, which has about $620 million versus the over $1 billion for Renren.

Also, Facebook is expected to grow by about 60% in 2012, but some analysts expect a sharp slowdown in the coming years. This means Renren, which already has similar growth rates at about 55%, could be growing faster than Facebook over the long run. It's a great time to lock up some of these cheap shares before Renren's potential is fully recognized by the average investor. The revenues and growth at Renren are not likely to be impacted by European debt issues or even a weak global economy, but the share price has given back some recent gains as short-sighted investors give us a chance to buy cheap. If the stock doubled from current levels at about $6 per share, it would still be below the $14 IPO price and very undervalued. With catalysts like rapid growth, the Facebook IPO, and the possibility for a buyout, it seems that Renren shares are like to trade back over the $14 IPO price sooner or later.

Key Data Points For Renren:

  • Current Price: $6.14
  • 52-Week Range: $3.21 to $15.70
  • Dividend: none
  • 2012 Earnings Estimate: a loss of 10 cents per share
  • 2013 Earnings Estimate: break-even results
  • Enterprise Value: about $1.48 billion
  • Revenue Estimates For 2013: about $256 million
  • 2013 Estimated Growth Rate: about 50%

Key Data Points For LinkedIn:

  • Current Price: $112.61
  • 52-Week Range: $55.98 to $122.70
  • Dividend: none
  • 2012 Earnings Estimate: 68 cents per share
  • 2013 Earnings Estimate: $1.24 per share
  • Enterprise Value: about $10.77 billion
  • Revenue Estimates For 2013: about $1.35 billion
  • 2013 Estimated Growth Rate: about 49%

Key Data Points For Baidu:

  • Current Price: $127.31
  • 52-Week Range: $100.95 to $165.96
  • Dividend: none
  • 2012 Earnings Estimate: $4.61 per share
  • 2013 Earnings Estimate: $6.42 per share
  • Enterprise Value: about $42.5 billion
  • Revenue Estimates For 2013: about $5 billion
  • 2013 Estimated Growth Rate: about 41%

Key Data Points For Tudou Holdings:

  • Current Price: $34.93
  • 52-Week Range: $9.50 to $44.80
  • Dividend: none
  • 2012 Earnings Estimate: a loss of $2.75 per share
  • 2013 Earnings Estimate: a loss of $1.95 per share
  • Enterprise Value: about $900 million
  • Revenue Estimates For 2013: about $238 million
  • 2013 Estimated Growth Rate: about 66%

Data is sourced from Yahoo Finance.

Disclosure: I am long RENN.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.