Renren (RENN.NYSE) has a valuable foothold in a rapidly growing market. The potential for social networking services is attractive: 457 million Chinese were online in 2010, up 20% year-on-year.
But is that foothold worth US$5 billion, Renren’s market cap at its IPO price? That values the company at 65-times last year’s revenues, compared to 25-times for Facebook’s most recent valuation.
Renren’s financials don’t support such enthusiasm. Its revenue growth has slowed and then reversed on a quarterly basis, falling 4.1% in the fourth quarter of 2010 and 1.7% in the first quarter of 2011.
Seasonality effects from the Lunar New Year may explain the drop in the first quarter, but Renren’s filing gave no clear explanation for the fourth-quarter decrease. It’s certainly not due to a lack of available ad dollars: Analysts estimate the social networking market will grow around 80% annually in 2011.
Slowing growth is more likely due to competition from newer, cooler services. Unlike Facebook, Renren does not dominate its market.
While Renren’s active user base grew 30% year-on-year to 117 million as of March 31, that pace was outstripped by Sina and Tencent’s “Twitter” services, which each accumulated roughly the same number of registered users in little more than one year. Renren also competes with Kaixin001.com, Qzone and Pengyou, which claim 90 million registered users, 481 million active users and 131 million active users, respectively.
And unlike many competing sites, Renren gets most of its revenue from games and internet value-added services, not advertising. The market for small, simple web-based games is growing at a good clip, but revenue is slowing for massively multiplayer online role-playing games (MMORPGs). Renren’s biggest MMORPG, Tianshu Qitan, contributed 14% of its total net revenues in 2010.
The company aims to boost growth by investing big in games and its group shopping site, nuomi.com. The former is a good sign, since Renren’s competitiveness will depend on them. However, entering the hyper-competitive group-buying market is far riskier.
IPO proceeds should help jump-start Renren’s revenue growth in 2011, but a $US5 billion valuation is far from
justified.