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Renren's IPO: Friending US Investors

May 03, 2011 3:55 PM ETMTBL
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

This week will see one of the year's most anticipated IPOs as Renren, China's largest "real name" social network with 117 million users, goes public. As the first of the world's major social networks to attempt an IPO, it is poised to benefit from significant investor enthusiasm surrounding social networking. Additionally, following strong debuts by other recent Chinese internet IPOs like Youku.com (+366%) and Qihoo 360 (+95%), investors are clearly excited by the secular story of China's increasing internet penetration and the country's rapid forecasted online advertising growth. After raising its anticipated price range to $12-$14 from $9-$11 in a sign of strong demand, Renren now seeks to raise $690 million and will also receive a concurrent $110 million investment from Chinese internet company Alibaba and investment firms China Media Capital and CITIC. Morgan Stanley, Deutsche Bank and Credit Suisse are the bookrunners on the offering, which is on this week's IPO calendar. The stock is expected to price Tuesday and begin trading on the NYSE under the ticker "RENN" on Wednesday.


Renren was launched in 2005 by a US-educated Chinese entrepreneur as a site where college students could connect and communicate and has since followed a similar evolution to Facebook's, broadening its user base to include high school students and young professionals. It has also gradually increased the stickiness of its site by introducing online games, streaming music and other features and opening the platform to third-party apps, which now number 1,700. These efforts have helped Renren increase its registered user base from 33 million at the end of 2008 to 117 million today; over the same period, its active users have grown from 17 million to 31 million.


Renren generated $77 million in revenue in 2010 (up 64% from 2009), the majority of which was split between advertising revenues and online gaming fees paid by users to buy virtual items. The company expects online advertising to increase as a percentage of revenue going forward, driven by continued growth in its user base and increased monetization. Revenue growth is also expected to be driven by its recently launched Groupon-like social commerce website Nuomi.com. Nuomi.com generated $1 million in revenue since its launch in mid-2010 and the company is investing heavily in it in an attempt to make it a significant contributor to overall revenue.


China currently has 457 million internet users, 38% of which engage in online social networking. Based on Renren's 117 million users, this implies a 48% market share. That said, only 31 million (26%) of Renren's users are currently active and many Chinese are members of multiple social networks. Other major social networks include Kaixin001 (which has 95 million registered users and is reportedly planning a US IPO) and 51.com. Renren also competes with Tencent's Qzone, which is larger but not considered a "real name" social network since users frequently use screen names. Competition is a key risk for Renren, particularly with Facebook reportedly considering entering China (likely in partnership with Baidu). Additionally, Renren's Nuomi.com competes with several other Chinese sites as well as Groupon, which recently launched in China.

Other risks

While Renren's growth over the last several years has been very impressive, its revenue fell sequentially in the two most recent quarters, which is a cause for concern. Although there is seasonality to the business, the trend may suggest that monetization of its user base is becoming more difficult. Perhaps more concerning is the relatively slow growth in the number of advertisers, which rose only 11% in 2010. With gaming revenue unlikely to be a large growth driver, the company is investing heavily in its social commerce site Nuomi.com, and this higher investment pushed Renren's operating margin negative in the March quarter. Nuomi.com has yet to gain significant traction and will continue to be a drag on margins for at least the remainder of 2011.


Despite these concerns, we believe investors will be drawn to Renren because of the excitement surrounding the global social networking industry and anticipation for eventual IPOs from Facebook, Groupon and LinkedIn. Reported valuations for Facebook and Groupon have continued to increase rapidly, as have multiples being placed on recent online video portal IPO Youku.com ($6.2 billion enterprise value, 108x LTM sales) which we believe will put Renren's seemingly high proposed valuation ($5.4 billion market cap and an enterprise-value-to-LTM-sales multiple of 53x) into context. Ultimately, with investors seeking exposure to social networking companies and putting high valuations on Chinese internet leaders, we expect Renren to be a hot IPO. That said, further out the company will have to make good on its goal of rapid user growth and increased user monetization in order to support its multibillion valuation, or else risk disappointing investors with very high expectations.

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