Renren (NYSE:RENN) shares are seeing more volume as well as more volatility in the past few days. Since this company is one of the leading social networking companies, in one of the world's most populous countries, it has tremendous growth potential. It is also likely to get a significant amount of additional media exposure when Facebook (NASDAQ:FB) goes public, around May 18, 2012. The Facebook IPO is reported to already be oversubscribed, and the demand from retail investors who could not buy into the IPO, could push it much higher on the first day of trading. Renren shares could be re-valued much higher as Facebook sets a new standard for valuation for social networking companies. However, I think an event that is much bigger than the Facebook IPO is coming for Renren, as it looks increasingly attractive as a takeover target. Renren is the largest social networking site in China and a recent Wall Street Journal article specifically mentions the popularity of Renren amongst Asian youths, it points out:
In China, nearly two thirds of those surveyed said they felt pressure to be in constant contact with various social media sites - most notably Qzone, weibo (microblogs) and Renren - with 58 saying that this obligation to social media is stressful. More than half said that this stress has increased from just a year ago. The Chinese market is one of the most robust in the world for social media, and according to a survey by McKinsey released last month, 91% of Chinese respondents said they visited a social media site in the last six months.
Let's take a closer look at Renren's potential as a takeover target:
The number of people using the Internet in China is growing very fast. According to one article, the number of web users grew by 12% and recently reached 513 million people. That means China added about 60 million users in just 12 months. Considering that the United States has a total population of about 312 million people, it's easy to see how significant it is for a single country to be adding about 60 million web users per year.
Renren is expected to have about 200 million users in 2012, and this is expected to grow rapidly as the company invests in mobile Internet. Facebook is reported to have about 901 million active users as of March 2012, and the company is widely expected to have a market value of about $100 billion when it goes public. This gives a rough value of about $110 per user. Renren would have a market value of about $22 billion (or trade for about $55 per share), if it had a $110 per user for valuation metrics. Of course, Facebook users on average are likely to have a higher income and that is one reason why it deserves to have premium value, however, one compensating factor in favor of Renren is the fact that Internet and smartphone growth is growing much more rapidly in China when compared with the rest of the world. Either way, the value of Renren is way too low at just about $6 per user (this number is calculated using Renren's current enterprise value and dividing by about 200 million users), and bound to rise.
China has a population of about 1.34 billion and that number is
growing. This gives Renren growth potential for the foreseeable future. Facebook is reported to have about 157 million users in the United States, and that is equivalent to about 51% of the total U.S. population. If Renren were to achieve a similar penetration rate in China, it could have 683 million users and that number can grow as the population increases. This shows the tremendous growth potential of Renren. One point to note is that Renren already appears to have more users in China (about 200 million) than Facebook has in the U.S. (about 157 million).
Chinese Internet companies have seen recent merger and acquisition activity and this is likely to continue as the industry consolidates. A recent buyout deal shows how the stock market can grossly undervalue some Chinese Internet companies. For example, earlier this year, Tudou Holdings Ltd., (NASDAQ:TUDO) shares were trading around $10, but then Youku, Inc. (NYSE:YOKU) decided to buy the company in a deal valued at $1 billion. The announcement of the deal caused Tudou shares to surge to about $40 per share, giving investors close to a 400% return in a matter of days. Since Renren went public at $14 per share, it would be hard to imagine management accepting anything less that $14 to $20 per share in a takeover.
The business model for social networking sites like Facebook and Renren is extremely attractive because there is no physical inventory, and no manufacturing to invest in or maintain. Also, much of the content is user generated and this leaves these companies with platforms that are highly profitable.
While Renren is primarily known for being the largest social networking site in China, it also owns 56.com which is a video sharing site similar to Tudou and Youku, a commerce site called Nuomi.com, which offers daily deals like Groupon (NASDAQ:GRPN), and it offers online games like Zynga (NASDAQ:ZNGA). This wide range of assets makes Renren an attractive target for a number of companies. Further enhancing Renren's appeal is the fact that it has no debt and over $1 billion in cash. That is equivalent to almost $3 per share in cash, which is incredible for a stock trading around $6. None of these other networking and Internet stocks have half the share price equivalent in cash. Plus, it has been seeing revenue growth of about 50% and it expects 50 to 55% growth in 2012. Renren went public in May of 2011, at a price of $14 per share. With Renren's fast-growth story and cash-rich balance sheet intact, and a bargain stock price, it could be an ideal buyout for a company seeking to add growth quickly. Some of the biggest Internet success stories in China have done well by emulating moves and strategies made by U.S. based companies. When you consider Google (NASDAQ:GOOG) getting into social networking with Google +, and a major tech company like Microsoft (NASDAQ:MSFT) buying into Facebook, it really makes sense for a major Chinese company to invest in or buy out China's fast-growing and largest social networking website, which is Renren. Here is a closer look at some China-based Internet companies, some of which appear to be well-suited for an acquisition of Renren:
Here are some key points for RENN:
Current share price: $5.69
The 52-week range is $3.21 to $14.80
Earnings estimates for 2012: a loss of 10 cents per share
Earnings estimates for 2013: a loss of 4 cents per share
Annual dividend: none
Baidu, Inc. (NASDAQ:BIDU) is a search engine company in China and it has been one of the best growth stocks over the past several years. Again, when you see companies like Google trying to compete with Facebook by creating Google + for social networking, it might make sense for Baidu to pursue this space by buying Renren as it is the largest social networking site in China. Google bought video-sharing site You Tube, and since Renren has the video-sharing site "56.com", this could be another asset for Baidu to consider. Baidu has about $2.55 billion in cash but it could do a stock transaction to buy a company like Renren which would also give it access to Renren's cash horde of over $1 billion.
Here are some key points for BIDU:
Current share price: $122.23
The 52-week range is $100.95 to $165.96
Earnings estimates for 2012: $4.61 per share
Earnings estimates for 2013: $6.42 per share
Annual dividend: none
Sohu.com Inc. (NASDAQ:SOHU) is based in China and it offers a number of online services and products which includes games, mobile games, news, ringtones, a website on real estate, message boards and more. This company has a strong balance sheet with about $871 million in cash and no debt. Sohu.com has the financial strength to make acquisitions and since it offers a wide range of Internet sites, a buyout of Renren could add synergy to its existing lines of business and boost growth.
Here are some key points for SOHU:
Current share price: $45.75
The 52-week range is $45.40 to $90.37
Earnings estimates for 2012: $2.62
Earnings estimates for 2013: $3.92
Annual dividend: none
Sina Corp. (NASDAQ:SINA) is based in China and it offers a popular blogging website at Weibo.com, plus it provides news, weather and other info to Internet users. This company has about $482 million in annual revenues and a market cap of about $3.6 billion, so buying a company like Renren would add significantly to its revenues and to cash balances. Sina has about $673 million in cash on the balance sheet and only around $2.2 million in debt. Since Renren has considerably more cash and a lower market cap, it could be a smart move for Sina to propose a stock transaction buyout for Renren which would create revenue growth and nearly triple its own cash balances.
Here are some key points for SINA:
Current share price: $53.71
The 52-week range is $46.86 to $128.17
Earnings estimates for 2012: 43 cents per share
Earnings estimates for 2013: $1.47 per share
Annual dividend: none
China Mobile Limited (NYSE:CHL) offers telecommunication services in China. This company is benefiting from the rapid growth in mobile phones. China Mobile dwarfs the other companies mentioned here in terms of revenue. It has about $52 billion in cash, so it could buy just about any company it wants. Because mobile Internet is a key area of growth for this company and companies like Facebook and Renren, it would make sense for China Mobile to invest some of its huge cash balances into a company like Renren. Cash balances earn next to nothing and when companies and investors see that a social networking site can grow to be worth over $100 billion in just a few years in the United States, it makes a lot of sense to invest in the largest social networking site in China, especially for China Mobile. A number of companies including Microsoft, invested in Facebook just a few years ago and that has paid off enormously. An investment, joint-venture or takeover of Renren could be a great move for this company.
Here are some key points for CHL:
Current share price: $56.17
The 52-week range is $43.51 to $57.29
Earnings estimates for 2012: $2.86 per share
Earnings estimates for 2013: $4.10 per share
Annual dividend: $2.03 per share, which yields 3.6%
Youku.com Inc., (YOKU) is known as the "Netflix" of China and it recently offered to buy Tudou Holdings, a video-sharing company for about $1 billion. Renren also has a video-sharing site with 56.com. This company has about $142 million in revenues so a buyout of Renren would add significant growth and cash. However, as this company recently already made an acquisition and because it is mostly focused on television and other online entertainment, I do not see it as a likely suitor.
Here are some key points for YOKU:
Current share price: $23.57
The 52-week range is $13.57 to $51.75
Earnings estimates for 2012: a loss of 33 cents per share
Earnings estimates for 2013: a profit of 10 cents per share
Annual dividend: none
LinkedIn (LNKD) is a professional networking website, based in the United States. It has a market cap of about $11 billion, and trades with a sky-high price to earnings ratio. This company is reported to have about 147 million users in 2012. This is considerably less than the user base that Renren is expected to have in 2012, which is about 200 million. LinkedIn is probably not a likely suitor for Renren, but it does show that there is room for more than one netwoking site that offers tremendous investment opportunity for shareholders. Also of note is that Renren has more cash on the balance sheet, over $1 billion, while LinkedIn has about $621 million. A major Chinese company should take a cue from the valuations of companies like Facebook and LinkedIn and buyout Renren while it is still super-cheap.
Here are some key points for LNKD:
Current share price: $107.23
The 52-week range is $55.98 to $122.70
Earnings estimates for 2012: 68 cents per share
Earnings estimates for 2013: $1.24 per share
Annual dividend: none
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.