3 Things to Watch With Renren
Jul 17th 2012 1:36PM
Updated Jul 17th 2012 1:44PM
Renren (NYS: RENN) operates a social networking platform in China and is often referred to as the Facebook of China. Renren derives its revenue from social, display, and in-game advertising, and through its online gaming segment.
Today, let's look at three things investors should be watching regarding Renren, as they'll provide us better insight into the company.
For the most part, China is still in its infancy in terms of Internet service growth. However, that doesn't mean there aren't a handful of competitors out there competing for the same slice of pie.
In the first quarter, Renren reported robust sales growth of 91% in its gaming segment. With gaming revenue now accounting for approximately 55% of total sales, it's imperative that Renren stay vigilant and innovative with online games, since there is no shortage of competitors. Currently, Renren is facing competition in China from SINA (NAS: SINA) , which recently teamed up with Japan's DeNA in a huge mobile social-gaming pact, Sohu.com (NAS: SOHU) , which has invested considerable time and money in its 17173.com portal, and online role-playing game maker Perfect World.
For Renren to succeed, it'll need to realize it's not the only fish in the pond and it'll need to turn its attention to monetizing its games on mobile platforms. Renren did take its first steps in this direction recently by signing a pact with DeNA as well, so now it's just a matter of waiting to see if its actions prove fruitful.
2. Operating expenses
I understand that Renren needs to spend money to make money, but at some point there's going to need to be a tightening of the belt if it ever expects to be decisively profitable.
In spite of a 56% total revenue increase last quarter, operating expenses ballooned 90% as cost of revenue more than tripled. Renren is spending a lot on its infrastructure build-out in order to increase bandwidth and make the site more user-friendly. In addition, game development costs are beginning to rocket higher and are proving to be a margin-constraining crux on PC and console game developers worldwide.
Thankfully for shareholders, Renren has just over $1 billion in cash with no debt, giving the company a comfortable cushion to improve its consumer reach. However, keep an eye on this figure if it continues to wilt under the steep costs of game development and infrastructure improvements.
3. China's government regulation
Perhaps nothing threatens Internet service companies in China more, or places more question marks over their heads, than the regulations China's government can choose to impose.
The first rule of investing in China is to understand that the freedom of speech we're accustomed to in the U.S. is not present in China. Those fears materialized last week when Chinese officials announced a content crackdown on pornography and violence in the region, which sent online video content provider Tudou Holdings (NAS: TUDO) screaming lower. Tudou derives a good chunk of revenue from what may be considered questionable sources by Chinese officials, so this will result in Tudou needing to spend more on hiring administrators to police its websites.
Similarly, Google (NAS: GOOG) pulled out of China because of the country's censuring tactics and chronic cyber-attacks. Rather than have access to more than 500 million Internet users and the potential ad spending of a country on pace to become the largest economy in the world within the next decade, Google chose to pack up and leave altogether.
Investors should understand that Renren could occasionally draw the ire of Chinese officials and need to be prepared to deal with the possible profit-crushing sanctions officials could impose on the company or sector as a whole.
Now that you know what to watch for, it should be easier to analyze Renren's successes and pitfalls in the future, and hopefully you'll gain a competitive investing edge.
If you're still craving even more info on Renren, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.
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The article 3 Things to Watch With Renren originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services have recommended buying shares of SINA, Sohu.com, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that feeds off your Facebook "likes."
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