Can Renren Keep It Up?

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Renren was one of last week's biggest winners, moving 20% higher after reports of an asset sale surfaced and a prolific dot-com giant drew closer to its IPO.

A Bloomberg report indicating that Baidu was moving to buy all of Renren's Nuomi -- a growing yet profitless flash-sale website -- got the shares moving. Why not? After acquiring a 59% stake back in August, why wouldn't Baidu move in for more?

A deal failed to materialize right away, but then Twitter filed its first financials since revealing plans to go public. You didn't need to thumb through the 800 pages of financials to know what this would mean for related companies. Twitter's IPO should help elevate valuations for social media leaders worldwide, and it only helps that it has yet to turn a profit. In fact, Twitter's losses have actually widened during the first half of the year.

Profitability has been a major drag at Renren, too. The red ink has been consistent. It posted a loss of $0.20 a share last year. It's on pace to ring up a deficit of $0.23 a share this year. Analysts see a loss of $0.22 a share come 2014.

It's not the only thing that has held Renren back. When it went public at $14 two years ago, it was billed as the Facebook of China. When Facebook itself had its IPO 12 months later, there was little reason for the comparison to stick. Facebook was profitable and growing a lot faster than the riskier Renren. Facebook's valuation seemed a little iffy at first, but Renren also hit the market at an unsustainable valuation. 

Facebook bounced back, justifying its original market cap -- and then some. It rose from the ashes of its broken IPO by accelerating growth, effectively monetizing mobile, and delivering booming earnings on widening margins. Renren has yet to prove that it's a viable growth story. Revenue in its latest quarter only moved 11% higher, and a major contributor to that growth was Nuomi. If Baidu does purchase Renren's minority stake in Nuomi, the financials here will look even less impressive. After all, in its latest quarter we saw Renren's online ad revenue climb just 2% and its once-bustling online gaming business inch a mere 1% higher. 

So, can Renren keep the rally going?
Outside of an outright buyout by Baidu -- and that doesn't seem likely -- the best bet here is for investors to punch out. Even if Twitter's IPO is a success and pushes valuations in social media higher, it's not as if Renren is cheap just because its stock is trading for a little more than $4 at the moment.  

At its $14 IPO price two years ago, Renren hit the market at a whopping 72 times the prior year's revenue. A lot of heady growth is baked into that valuation, and clearly Renren didn't justify its original price tag. 

Growth has slowed dramatically, and that will become even more apparent now that Nuomi is a minority stake (if it even retains a stake at all). Back in August it warned that revenue will actually decline by 3% to 7% for the current quarter. Renren has to prove itself worthy to be considered a sympathy play with the Twitter hype, and so far it has yet to prove itself worthy of hopping on those coattails.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends, Apple, Baidu, Facebook, and Google. The Motley Fool owns shares of, Apple, Baidu, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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