Here Are The Key Challenges Impacting Renren

Renren‘s (NYSE:RENN) business has faced a significant decline in the past few quarters — the company’s top-line fell by 43.9% and 41.1% in 2014 and Q1 2015, respectively. The company has undergone considerable restructuring and is now focusing on online finance to reinvigorate its business outlook. In this article, we take a close look at the some of the key challenges that have plagued the company of late. This comes against the backdrop of a recent non-binding proposal by the company’s top executives to take the company private, by acquiring all the ordinary shares not already owned by them.

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Intense Competition Caused Fall In User Base: Owing to intense competition from Tencent’s WeChat and Sina’s Weibo, the user base on Renren has eroded over the past few years. In March 2015, its monthly unique log-in user base was seen at 46 million, which represented almost a 10% year-over-year decline. The company has been unable to grow its audience network beyond college students. With user bases and engagement being the key factors driving monetization on social networks, this has also adversely impacted the company’s top line over the past few quarters.

Inability To Properly Monetize Mobile Platform: Although the mobile platform presently accounts for around 90% of Renren’s user base, the company has been unable to successfully monetize this platform. Only 15% of its online advertising revenues were derived from the mobile platform in Q1 2015; in comparison, mobile comprised around 58% of overall advertising revenues for Sina during the same quarter. We believe the intense competition from other social networks coupled with the decline in user base on Renren factored into this low monetization level for Renren. Also, marketers’ preferences for video ads have also played a role in these challenges.

Online Advertising and Gaming Businesses Have Suffered: The above factors have directly resulted in reduced business for the company. In Q1 2015, Renren’s online advertising revenues fell by 62.9% annually. In addition, its games net revenue came down by 56.5% year-over-year. The company has shelved in-house development of games, and is now solely focused on licensing games on its network. While the company launched two new mobile games (through licensing) in April, some of its older games reached the end of their lifecycles recently. This contributed negatively to the overall gaming revenues.

Increasing Losses: Although the company’s selling & marketing expenses and R&D expenses came down in the last quarter due to reduced branding and promotion activities, as well as a lower headcount, the company’s operating loss reached $26.5 million in Q1 2015 as compared to $23.9 million a year ago. This was largely caused by a decline in the top line coupled with an increase in general & administrative expenses.

Decrease In Cash Reserves: Renren’s cash and cash equivalents, term deposits, and short-term investments (all current assets) declined to $413 million at the end of Q1 2015, as compared to $706 million at the end of last year. An increase in long-term investments and stock buybacks have resulted in this decline. We believe this reduction in cash reserves could lead to increased costs of capital for the company’s online financing business.

In view of the above challenges, we currently have a $2.50 per share price estimate for Renren, which is significantly lower than its current market price.

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