After A Terrible Quarter, Renren's Future Remains Bright

Social network stocks have done terrific this year. Marketers are showing more ads on social networks and spending less money on printed media, as one of every four minutes online is spent using social networks. It's no wonder why investors long in Facebook , LinkedIn, or Twitter have seen amazing returns.

However, although these companies have also seen meaningful improvements in sales and earnings, their market valuations are far from cheap. Given such high multiples, and considering the high level of uncertainty surrounding monetization of social networks, many prefer to stay on the sidelines when it comes to Facebook -- trading at 98 times earnings -- or LinkedIn. In this bullish context, distressed and unloved Internet company Renren , also known as the "Facebook of China," could be an interesting play, as the company just saw a massive sell-off after a disappointing earnings call.

Not all social networks are created equally
Renren, which operates one of the most popular social networks in the second-largest economy, has lost more than 80% of its market capitalization since it went public. To put this in perspective, in the same period, competitor Tencent Holdings  experienced massive share appreciation, as its messaging apps Tencent QQ and WeChat gained international users, and therefore more advertisers. The company has become the third-largest Internet company in the world, only behind Google and Facebook.

The good, the bad, and the ugly
Things are said to be cheap for a reason, and in the case of Renren, the company has never been consistently profitable. The latest earnings call came in with revenue down 5.6% from the same quarter in 2012. This caused the company to report a loss of more than $35 million. Right after the company announced these poor figures, Jefferies downgraded the stock to "underperform."

It's important to highlight that, despite a weak third-quarter performance, Renren is still a long-term growth story. This is because Renren is a holding tech company, with presence in virtually every important market segment from online games to social media. The latest results were caused by a strong decline in game revenue -- down almost 17% year-over-year -- as some of the company's top-grossing titles reached "maturity" and lost many users. 

The good news is that the social network business unit keeps adding new users. Last year, Renren added almost 28 million new users. Monetization remains weak, but at the current stage the focus should instead be on user growth figures. Furthermore, Renren may not excel at monetizing its social network directly, but it uses its enormous user base to bring high traffic to its new apps. For example, it developed Groupon-like buying site Nuomi.com in 2010, and managed to sell a 59% stake in this business to search engine giant Baidu for about $160 million.This shows how fast Renren can create meaningful value.

Renren is also making steady progress in its social network and messaging business units. Even on the gaming side, Renren plans to launch several new in-house game titles next quarter. This increases Renren's chances to release a hit.

The catalyst everybody is waiting for
Clearly, Renren's main asset is its 200-million-member-strong social network service, which isn't fully monetized at the moment. Establishing a solid, sustainable monetization plan for the social network remains a top priority. With China's mobile penetration still well below average, and considering the country already has close to 600 million Internet users, Renren -- whose demographics are pretty young -- is likely to do fine in the future, both in terms of user growth and monetization. Investors bullish on China's tech sector may do well adding this stock to their watch lists.

My Foolish take
Bottom line, Renren is a cheap social network with an interesting growth story. For less than $3 dollars per share, investors can add exposure to a company that's actively using its user base to start new ventures and build a well-diversified portfolio of apps, covering every available segment from e-commerce to gaming. Ultimately, it may be useful to rethink the value of a user profile. At $1.1 billion, the market thinks a Renren user profile is worth less than $6, which may be too cheap considering Renren's ability to start new businesses, drive traffic, show ads, and promote games.