UPDATE: As Reuters reported late on Tuesday, RenRen didn’t actually price until early Wednesday morning (at $14), but its American Depositary Shares started trading Wednesday on the NYSE as scheduled.
This was Renaissance Capital’s shadow US IPO backlog at the end of last year, as we then reported:
Of those companies listed as “Social Media/Network”, LinkedIn has filed for its IPO but has yet to give many specifics; Groupon plans to list later this year; Facebook continues teasing us while trading at lofty valuations on secondary markets; and Zynga’s maker is again denying rumours of an IPO anytime soon.
Those were all big names coming into the year, but the spotlight recently has shone on the first name in the category, Oak Pacific Interactive — yep, now better known as RenRen. It will trade on the NYSE under the ticker RENN.
Obviously the listing will make it the first in this category to start trading publicly and, along with exposure to the Chinese internet-user base, that explains a lot of the investor enthusiasm behind it.
And the company’s underwriters do seem to have encountered plenty of said enthusiasm: it’s expected to list at a higher price than was expected even as recently as late last week. According to its latest SEC filing, RenRen will issue shares on the NYSE at between $12-14, above the previous expected range of $9-11. The listing will raise about $744m and will value the company at close to $5bn.
But there’s a lot for investors to consider once the company finally starts trading today, and we think a list is in order:
— The company is ruthless about monetisation, among other things. Or as this post by Mashable writes, RenRen is “like a miniature Facebook with a mean streak and a quest for monetization.” The post also includes the story of how RenRen went after rival Kaixin001 by purchasing the domain name Kaixin.com and setting up a clone.
— According to bankers working on the deal contacted by the FT, RenRen generates $0.80 in ad revenue per user compared to $4 at Facebook. This would seem to imply a big opportunity, but…
— … This FT story focuses the differences between Facebook and RenRen, including their monetisation models, so the comparison doesn’t necessarily hold:
While Facebook operates an open platform where external developers can launch services, Renren has so far allowed only 1,000 of more than 100,000 applications submitted by third parties. The company also has its own games.
The two companies’ monetisation models are also quite different. Facebook’s is much more mature. The company is expanding aggressively, with the recent rollout of a daily deals initiative, its courtship of advertising agencies and the increasing number of uses for credits, Facebook’s currency for virtual goods from which it takes a 30 per cent commission on each transaction.
Compared with Facebook, Renren’s model is in its infancy. Its ads are much less targeted because there is much less reliable data available in China. Advertising accounts for only 42 per cent of the Chinese company’s revenues, with most of the remainder coming from Renren’s own games.
— RenRen had revenues of $77 million last year, a healthy 64 per cent jump from 2009. According to Renaissance Capital, which profiled RenRen as its featured IPO this week, the company also expects online ads to grow as a percentage of its revenues (they’re currently a bit more than 40 per cent).
— But the company’s revenues have fallen in the last two quarters (see also this report), and its bottom line has been in the red the last two years. This is only partly the result of normal costs associated with growing a young business, but not entirely — and it’s not clear how burdensome these costs will continue to be. Some details from the the most recent filing:
We had net income from continuing operations of US$51.9 million, a net loss from continuing operations of US$68.3 million and a net loss from continuing operations of US$61.2 million in 2008, 2009 and 2010, respectively. Our net income and net losses from our continuing operations reflect the aggregate impact of non-cash items relating to the change in fair value of our then outstanding series D warrants, share-based compensation, amortization of intangible assets and impairment of intangible assets of US$71.2 million in income in 2008, US$71.3 million in expenses in 2009 and US$78.6 million in expenses in 2010. All outstanding warrants to purchase series D preferred shares were exercised in December 2010. In addition to the aggregate impact of these non-cash items, our results of operations for the past three years were affected by costs and expenses required to build, operate and expand our SNS platform, grow our user base, promote our Renren brand, develop our own products and services, license third-party products and applications, and make strategic investments. We expect that we will continue to incur research and development, marketing and other costs to launch new services and grow our user and advertiser bases.
— RenRen’s management team has impressive experience building social networking site; see this TechCrunch analysis for more.
— RenRen has a dominant position in China and owns the all-important young urban demographic, but it also has a ton of competition. Other popular social networking sites in the country include Qzone, 51.com, Weibo, Sina, and the aforementioned Kaixin001 — not to mention the possibility that Facebook itself will one day find its way into China. Check out TechRice to see a full list.
And here’s RenCap with more numbers on the Chinese market:
China currently has 457 million internet users, 38% of which engage in online social networking. Based on Renren’s 117 million users, this implies a 48% market share. That said, only 31 million (26%) of Renren’s users are currently active and many Chinese are members of multiple social networks.
— About the growth in that active user number: RenRen has been mighty cagey about it, and last week had to change it to reflect a slower quarterly growth rate (19 per cent) than had previously been implied (29 per cent).
— Just on Monday, Derek Palaschuk, the head of RenRen’s audit company and an independent director, resigned from the board amid accusations of accounting fraud at another company.
— What about the valuation? Bloomberg writes that at the midpoint price of $13, Renren “would trade at 67 times last year’s sales, compared with 25 times for Facebook as valued by Goldman Sachs Group Inc.’s investment in the U.S. company.” These metrics here aren’t an apples-to-apples comparison, as we noted above, but that still seems a bit frothy. We were especially amused by this:
“You can say it’s overvalued, but people are going to buy it anyway,” said Darren Fabric, a Chicago-based managing director at IPOX Capital Management LLC, which oversees about $2.5 billion and invests in IPOs.
We won’t presume to know exactly what to make of all this. Given the extraordinary performance thus far of other Chinese internet companies recently listed on US exchanges, it’s a good bet that RenRen will be a hot IPO. And given the potential for growth in the Chinese, maybe the company will one day grow into what appears to be an over-aggressive valuation right now.
But several of the items above make us nervous, especially those around the valuation and competition. A lot of the excitement generated by the listing appears to be more about the investment space occupied by the company than about the company itself. Investors with a longer-term framework have a lot to be mindful of.