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In Q2, Renren (RENN) saw net revenue grow 47% y/y, driven by strong gaming revenue growth (+122% y/y) that offset the weak ad revenue growth (10.5% y/y decline). Management guided 43%-49% y/y growth in revenue for Q3 that suggested the mixed momentum of weak ad revenue and strong gaming growth to continue in the near-term.

I am updating my Sum-of-The-Parts model to lower my fair value per share estimate to $3.52 per share from $4.56. For my prior estimate, please see my November 24th note titled, "Valuing Renren Using Sum-of-The-Parts Model."

(click to enlarge)

Key Assumptions

Online advertising: Renren's online advertising will continue to face headwinds due to the soft macro environment, the gradual shift from PC to mobile, and competition from more popular social network platforms such as Sina's Weibo (SINA) and Tencent's (OTCPK:TCTZF) QQ. For 2012, I forecast to decline 5% y/y. Under a Bullish Scenario, I value the online ad business at 5x EV/Revenue, or a 30% discount to Sina.

However, investors should also note that Renren's investment in R&D is paying off as indicated by the rising MAU in Q2 (+32% y/y vs. Facebook's +10% y/y). On a long-term, Renren's MAU growth may continue to be resilient and become increasingly attractive to the advertisers.

56.com: I estimate revenue contribution from 56.com to be approximately $20 million for 2012, on par with that of Ku6.com (KUTV) given its lack of network effect among online viewers. However, a slight improvement in revenue contribution could materialize after Renren and 56.com agreed to consolidate user log-ins and introduce the "Share+" function back in May. We could see a slight increase in user traffic from Renren to 56.com but I expect such increase to be immaterial in the near-term.

Online games: Online gaming is one of few rising stars within Renren's business segments. The company is currently working on 10 in-house developed titles and 40-50 titles with third-party developers. Cross-platform games that run on both PC and mobile will be a key focus as it lessens the need to share revenue with mobile OS platforms such as iOS (AAPL) and Android (GOOG). At the recent Global Mobile Internet Conference, Renren announced that it is working with companies such as Rovio, Flipboard, and DeNA to share resources and create a more robust mobile ecosystem. Because online gaming is a fast growing business segment, I applied a 3.5x EV/Revenue multiple under the Bullish Scenario.

Nuomi: Renren's group-buy unit is growing strongly amid industry consolidation. A recent check in both the Apple Store and Google Play revealed that Nuomi ranks in the top five of most downloaded group-buy apps in China. However, profitability remains a key concern and it is unlikely to be realized in the next several quarters. As a result, I applied a modest 4x EV/Revenue multiple under the Bullish Scenario

Source: Renren Model Update: Current Investment Cycle Keeps Me On The Sideline