Investors have put some serious volume into investing in Renren, the “Chinese Facebook” over the last three days, seemingly identifying the site as a possible social media growth stock that can ride the coattails of Facebook. Between January 29th and the end of the 30th, the stock rose from around $4 to a high of $6.50, but has since come down to around $5.50. The question is whether the stock will continue to grow as the Facebook IPO goes through.
Facebook is about to file their IPO papers, and the big questions are going to center around revenue and earnings; Have they continued their growth since 2009, when the public got a glimpse of their $1.24 Billion in revenue and 180% year over year revenue growth? If so, it’d put them somewhere in the range of $4 Billion. A later revenue estimate showed about $355 million in earnings in September 2010. For estimates’ sake, if we imagine the revenue doubled since then (a grossly optimistic assumption), that’d be $700 million in revenue today, and that would make the current Facebook IPO valuation estimate of $100 billion give the stock a 142 P/E ratio — which is very high. That would make the stock expensive.
By contrast, looking at Renren, we see that even with a user base around 125 million and monthly unique users at 34 million, the revenue is around $35 million, if they stay on target. However, they are just breaking even with that revenue point, and are not yet a profitable company. That makes their current P/E ratio extremely high, and any purchase at today’s price could get shaken up by a single weak quarter. This is why jumping in on the highly volatile stock at this point may not be a good idea. It depends on the revenue growth over the next few quarters, and that revenue growth depends largely on their social games and group buying products.
So what do you think? Are you going to buy Renren hoping it jumps another 20% on the back of the Facebook IPO news?
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