RenRen as Alternative to Facebook (RENN vs FACE)

           

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With all the news about the upcoming Facebook IPO, many people are wondering if they should take the opportunity to buy Facebook once it starts trading.


My thought is that the underwriters know that this will be one of the most closely watched IPOs of the decade, so expect that the IPO will be under priced.  There will almost certainly be a meaningful pop of 25% or more on the first day.  So, if you are fortunate enough to get in on the IPO, then it's probably best that you do so.  Of course, under pricing the stock is bad for the company.  But they are selling $5 B worth of stock that day, so perhaps that will be enough cash.

Since we have no idea where the stock will trade after it floats, it's difficult to make an opinion based on valuation.  The next reports are suggesting something in the range of $75 to $100.  So for the sake of thought, let's assume it prices the night before at $80 B and then has an immediate 25% pop and starts trading at $100 B.

Obviously FB is behemoth of a company.  $100 B given it's market power today seems reasonable.  Currently Google is worth $198 B, but unlike FB they have massive amounts of revenue and profit to back that up that valuation.  They trade at about 5X revenue and 20X earnings.  At a valuation of $100B, Facebook would be trading around 60X revenue is which is VERY steep.  10X revenue was considered "rich" even in the dotcom bubble.  What is attractive about FB is that is have undeniable stickiness, and it currently is the #1 most visited site in the US.  Importantly, it also has a very long average visit time compared to the other top sites. The network effect of Facebook's market share is very compelling -- and it's hard to construct a scenario where users start leaving Facebook in mass.  So from that point of view, the is the moat around the business is VERY wide -- and in that way it is much more like Microsoft or Google than Groupon or Netscape. 


In the end, it's just that fact that the valuation is so high already that it difficult to get really excited about it.  At $100B, it doesn't have a lot of room to grow -- it would be around the 25th most valuable company in America. It's peer companies (in terms of market cap) would be Cisco, Pepsi, McDonald's.  If you are looking to double your money, then FB would have to grow to the 7th (or so) largest company, surpassing the likes of Proctor & Gamble, AT&T, and GE to get there.  

So, I went searching for a cheaper alternative.  I've decided to play the Facebook IPO through Renren (RENN). The "Chinese Facebook" it doesn't have the same market dominance that FB has.  Even in China, it is only the 2nd or 3rd most popular social networking site.  But with 120 million users (and growing) it has a real opportunity to truly become the "Facebook of China."  It is clearly copying them in many ways.  At $2B (23X revenue), the valuation is still high, but much easier to swallow.   As a follower of FB, is has the luxury of just replicating the way Facebook creates user experiences and generates revenue.  The reports that I read suggest that RENN is making excellent gains in Chinese market share.  However, I don't know how reliable any of that data is.

In addition to being a cheaper stock with more potential for growth, RENN might be an acquisition target for Facebook.  Facebook has a tiny, tiny, tiny share of market in China.  A few billion to jump to the top of the list -- buying a site that has essentially a Chinese knock-off of the Facebook user interface might be an easy decision for a CFO that has $100 B of FB equity to trade with. 

Also, RENN has performed terribly since it's IPO, so the hype has already faded from that star and is ripe for some attention.  The Facebook IPO might be the catalyst to bring that to the front of mind for both retail and institutional investors.

As a closing thought, for Facebook to be worth the same as Google ($190 B), it needs to double from the IPO.  That means it needs to create $100 B worth of value, which is not easy.  For RenRen (RENN) to double, it only needs to create $2 B of value.  That seems a lot easier to do when you have a $100 B big brother to follow and a powerful Chinese government that would rather have you succeed than your big brother.

MONKEY BUSINESS

Buying: RENN @ $5.30

Holding: AGQ ($79.85, $63.16, $54.10, $60.35),  UGL ($91.00), AVL($2.72), NFLX ($74.70), DAG ($11.00)