Recent Renren Uptick May Turn Out be a Bull Trap
Recent Renren Uptick May Turn Out be a Bull Trap
RENN top line has gradually declined since Q1 2014 and in Q1 2016 they posted a $10.78 million revenue
Gross margin of RENN has gone down and they have two quarters worth of runway left in term of cash and equivalents
RENN management seems to understand that revenue from advertising won’t save the company and they are desperately trying to diversify the venture
The recent undertaking of RENN may or may not pay off in the long run and short-term outlook appears gloomy at best
Zacks just downgraded RENN from “hold” to a “sell” and we believe the stock price is headed south
Renren Inc (NYSE:RENN) operates a number of online portals including social networking that enables users to connect and communicate with each other, share information, create user generated content, play online games, and enjoy a wide range of other features and services.
There are two segments of Renren Inc, Renren and Renren Fenqi. The first segment is primarily involved in online advertising and various fringe value added services to users and advertisers. On the other hand, they are working to introduce a range of internet based financial products through Renren Fenqi, that targets its massive user base who are mainly comprised of young audience and university students from China.
Renren Fenqi has started offering installment credit facilities to university students in China and they are gradually expanding the range of financial services, such as credit financing to used car dealers.
Furthermore, Renren Inc has developed a financing and lending platform called Renren Licai.
As of July 11, 2016, Renren Inc had a market capitalization of $433 million and employed over 1,070 people in their offices.
Analysis of Recent Financial Performance of Renren
Figure 1: Since IPO, Renren Inc’s Stock Price Has Declined by 87.29%
Since Renren Inc floated its IPO at $14 per share, its stock price has gone down by 87.29% and it is currently trading at $1.78 per share. Although the company lost the bulk of its market capitalization in 2012, the price had a technical support level around $2.50 per share, which was broken earlier in 2016 amid less than stellar financial performance.
Figure 2: Renren Inc Has Failed to Deliver Top Line Growth Over the Last Five Years
Like any other internet portal business, social media services heavily depend on an expanding user base. Although Renren Inc claimed to have 228 million active users last year, they have repeatedly failed to monetize their internet traffic. Besides the huge dip in revenue in Q4 2013, Renren Inc has managed to keep its quarterly revenue above $10 million for the last two years.
But, instead of increasing the top line, they seem to be fighting a losing battle as the revenue has gradually come down to just $10.78 million in Q1 2016. Compared to around $50 million in Q3 2012, Q1 2016 revenue was around 78.44% lower! That’s not a sign of an expanding social networking platform by any standard.
In Q1 2016, Renren Inc managed to post a gross profit of $2.4 million, but the operating loss was $19.2 million, which is actually an improvement against $27.8 million loss in the same period last year.
Figure 3: Renren Inc is Burning Cash
Over the last five quarters Renren Inc has dramatically burned a lot of cash trying to create the kind of buzz it required to compete against other social networking platforms. As a result, by the end of Q1 2016, Renren Inc had only $76 million left in cash and equivalents, while its quarterly total expenses remained just below $30 million. At this burn rate, Renren Inc has around two more quarters of runway left before they will run out of money. Unless, of course, they raise more funds.
Renren Inc is not a new startup, it was founded by Xing Wang and Huiwen Wang at the end of 2005! Although the current owners have raised a lot of money a few years ago, the appeal of the platform has always stagnated to younger demographics. Unlike some of the western social media platforms who have successfully diversified their user base, Renren Inc has turned to diversifying its business itself and exploring financial products etc.
It means the management has accepted the fact that advertising revenue won’t be enough in the long run and they are actively looking for a way to leverage the active users in order to monetize the business. While these recent efforts may or not may pay off in the end, the short-term outlook of the company remains gloomy at best.
Earlier today, Zacks Investment Research has downgraded Renren Inc from a “hold” to a “sell” rating after the stock price gained around 23%, from $1.54 on July 8 to $1.9 on July 12. Actually, Renren Inc had a price target of $1.9 per share, which has already reached. We believe the recent uptick was a result of a profit taking move and does not indicate a reversal and the price would likely move south from here on.