Driven by the news of Facebook's impending IPO, Renren's stock price surged significantly, offering some solace to Charles Chen.
Introduction: An analytical article written by Bill Powell for the American financial website CNNMoney was published on Wednesday. It discusses how the positive news surrounding Facebook's IPO has driven Renren's stock price up by 60%, providing a sense of relief to Renren's CEO, Charles Chen. The diversification of social networking sites in China has led to more intense competition.
The following is the full text of the article:
The hype surrounding Facebook's IPO raises an interesting question regarding its implications for Renren. Charles Chen gave a light laugh because this issue is more complex than it appears. Renren is often referred to as "China's Facebook."
In the week before Facebook confirmed that it would go public later this year, Renren's stock price soared by over 60%, which provided some comfort to Chen. Since its IPO last May, Renren's stock price reached a peak of only $24 and then steadily declined, hitting a 52-week low of $3.20 last month.
The fall in stock prices can be attributed to a perfect storm, partly due to the hype surrounding Renren's own IPO. When discussing Renren's IPO, at least some investors bought shares first and asked questions later when they saw Facebook and China mentioned together in the same sentence (as in "China's Facebook"). After all, China has more internet users than any other country, but social networking sites are still in their infancy there. According to data from internet traffic monitoring company comScore, 38.4% of Chinese internet users use social networking sites, lower than the global average of 69.8% and the U.S. figure of 81.4%. This suggests significant growth potential for social networking sites in China.
Short Selling of Chinese Stocks
However, Chinese stocks listed in the U.S. were rudely treated last year mainly due to growing concerns about the authenticity of these companies' disclosed financial data. Just days before Renren launched its IPO, Citron Research issued a report questioning the financial data of another company whose CFO, Derek Palaschuk, also served on Renren's board and as the chairman of the audit committee. Eventually, Palaschuk resigned from his position at Renren, a move welcomed by Renren's risk investors.
Nevertheless, the increased attention on short selling of Chinese stocks has harmed the market regardless of whether the data they release is true or not. Renren is one of the companies caught in this indiscriminate attack.
Not only does the concern over fraudulent financial reporting lead to short-selling sentiment, but the misunderstanding of China's overall internet environment, especially regarding social networking sites, is also a contributing factor. Last week, the 42-year-old Chen used Facebook to introduce Renren and its business. Chen and Renren's CFO, David Huang, emphasized that people need to understand that although Facebook cannot be used in China, this does not mean that "China's Facebook" lacks competitiveness.
Social Networking Fragmentation
On the contrary, compared to the U.S., China's social networking sites are more fragmented, with many companies copying Facebook's model to enter the social networking sector.
Sina operates a well-known microblogging site called "China's Twitter." Tencent is similar; it owns the instant messaging tool QQ and operates QQ Zone, which claims to have 481 million active users, though analysts question how Tencent defines "active users."
Last autumn, Tencent officially invested in Kaixin001, another social networking site that aims to create a real-name registration platform. Similar to Renren, Kaixin001's users tend to be young, urban, and well-educated. Therefore, when Chen said that China's social networking market is "more competitive than the U.S.," he was correct.
Broad Business Scope of Chinese Tech Companies
In China's tech sector, each company's business scope extends into others' territory. Last year, Chen spent $80 million to acquire 56.com, a video and photo-sharing website, bringing Renren closer to the video domain dominated by Youku and Tudou, known as "China's YouTube." Renren also launched a group-buying site, Nuomi, last year. These three platforms—social networks, games, and group-buying sites—mutually enhance traffic. Renren hopes that acquiring 56.com will increase user stickiness on the social network and attract advertisers.
Chen stated that Renren has completed its new asset acquisition plan for now and is currently focusing on making its platforms more profitable. In the third quarter of this year, despite a 57% revenue increase to $34.2 million, Renren still incurred a loss of $1.2 million.
Social networking sites clearly have appeal. As of the end of September last year, Renren had 38 million monthly active users, up from 24 million in the same period the previous year. Advertising revenue accounted for 57% of Renren's total revenue in the third quarter, up from 42% the previous year.
Chen realizes that Chinese stocks are in an environment where they must prove innocence after being accused. For cautious investors, their attitude in the foreseeable future is simple—"show me." Chinese stocks need to release good earnings reports to ensure investor trust. Doubts now follow every Chinese company.
In September last year, Renren announced a $150 million share repurchase plan to demonstrate its belief that it holds a leading position in the real-name market within China's social networking sector. Although competition in the social networking field is fierce, the potential for growth in this area remains undeniable. If Renren and Chen can seize this opportunity, the concerns about stock prices may prove to be "excessive." Facebook's IPO plans have reminded some investors of this potential.