March 24 (Bloomberg) -- Back in May 2011, investors were giddy about the chance to buy a piece of Renren Inc.
The Chinese networking website was seen as such a can’t- miss stock on Wall Street that its initial public offering fetched a price that made the company more than twice as valuable as Facebook Inc. At $14 a share, Renren debuted at a level equal to 72 times annual sales.
Three years later, the price is just $3.22, and the valuation less than eight times sales. The stock’s 77 percent collapse is a tale of unfulfilled expectations. Investors were counting on Renren benefiting from an industry boom that raised the number of Chinese Internet users to twice the entire U.S. population. What they’ve gotten instead is stagnant revenue, shrinking market share and eight straight quarters of losses.
“They failed to expand,” Cyrus Mewawalla, an analyst at London-based CM Research, said in a March 18 telephone interview. “That’s what’s causing all the hardship.”
Renren fell 14 percent in New York trading last week after saying its user base dropped 20 percent last year, deepening the selloff as Alibaba Group Holding Inc. prepares its IPO. Investment bankers value Alibaba, China’s biggest e-commerce company, at as much as $200 billion, according to a person familiar with the matter.
“We’re in a hype phase at the moment,” Mewawalla said. “You see that valuations are extremely high.”
They were once high for Renren. The 72 times sales multiple in the IPO compared with 25 times for Facebook at the time, based on Goldman Sachs Group Inc.’s investment in the company a year before it went public.
Renren sank 1.9 percent to $3.16 at 10:51 a.m. in New York as the Bloomberg China-US Equity Index of the most-traded stocks in the U.S gained 0.4 percent.
Two e-mail messages and three phone calls to Renren’s investor relations department in Beijing, left after regular business hours, weren’t immediately returned. Another two calls made during office hours also weren’t answered.
Concern the company’s loss is widening mounted after it forecast on March 18 that first-quarter revenue will drop as much as 45 percent from a year earlier. Revenue from online advertising declined 18 percent in the fourth quarter while net revenue from games plunged 40 percent as users shift from desktop computers to portable devices, where applications such as Tencent Holdings Ltd.’s WeChat are gaining market share.
The company has restructured its gaming teams to be “much leaner and more nimble,” Chief Executive Officer Joseph Chen said during an earnings call on March 18. Renren is focusing on its “core user base of college students and young generation,” he said.
Andrew S. Zamfotis, an analyst at evaDimensions LLC in New York, raised his recommendation on the stock to buy on March 6.
“That decline may have been too much,” Zamfotis said in an e-mail March 20.
Monthly unique users decreased to about 45 million as of December, Renren said in a statement March 18. That compares with more than 355 million monthly active users for WeChat. China had 618 million Internet customers as of Dec. 31, a 4.6 percent increase from June, according to a report by China Internet Network Information Center. Mobile-phone Internet users in China increased 19 percent last year to 500 million, a report by China Internet Network Information Center shows.
Mergers and Acquisitions
“The company needs to diversify its business, because otherwise it will get pushed out by the industry’s giants,” Lou Kerner, the New York-based manager of the Social Internet Fund, which invests in social-media companies, said in a telephone interview on March 19.
Mergers and acquisitions as well as heightening competition will erode Renren’s earnings, CM Research said. Baidu Inc., owner of China’s biggest search engine, purchased a 59 percent stake in Renren’s Nuomi.com in August, about a month after announcing it will acquire 91 Wireless Websoft Ltd.
Alibaba offered last month to buy the shares it doesn’t already own in AutoNavi Holdings Ltd., a Chinese online map content provider. The e-commerce company kicked off the process for what may be the biggest U.S. IPO in two years on March 17. At at value of $200 billion, this would it the biggest Internet company behind Google Inc. based on market capitalization.
“When Renren went public, it decided to occupy a small niche and thought they would profit off that niche,” Jeff Papp, a senior analyst at Oberweis Asset Management Inc., which manages $1.1 billion in assets, said by phone from Lisle, Illinois on March 20. “They never really took off, and I’m afraid it will be extremely hard for the company to catch up.”
Renren’s decline over the past three years is the third worst on the Bloomberg China-US Equity Index. The measure added 0.6 percent last week to 97.05 in New York. Huaneng Power International Inc., China’s biggest electricity producer, rallied 20 percent in its biggest weekly advance since 2008. Yingli Green Energy Holding Co., the world’s largest solar panel maker, tumbled 17 percent to the lowest this year.
“Renren was kind of smoke and mirrors when it became public and that was almost three years ago,” Francis Gaskins, research director at financial media site Equities.com, said by phone from Marina del Rey, California on March 21. “Three years in this space is almost a lifetime.”
--With assistance from Ye Xie and Gabrielle Coppola in New York and Weiyi Lim in Singapore.