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Investment Overview for Renren (NYSE:RENN)
Renren.com is China's largest social networking site (SNS). The social networking service operates in a similar fashion to Facebook (FB) in which users can set up their own profiles, post updates, upload pictures and send messages to other users in their network.
Renren's competitive advantage lies in a superior user experience and large user base, resulting in strong network effects. In addition to its flagship name SNS platform, Renren also offers online games, Jingwei.com - a professional social networking site similar to LinkedIn and Chewen.com, a car enthusiast social networking site.
Payments On Virtual Goods
Online gaming revenues constituted 55% of Renren's total revenues in 2013. As the company introduced new games (licensed, self-developed and third-party), the company has been able to successfully leverage the virtual goods markets. Even though it is free to sign-up and play the games, users need to purchase virtual currency and other paid services to improve the strength of their game character and gain access to in-game accessories and pets.
Text And Display Ads
Online Advertising constituted ~30% of Renren's total revenues in 2013, down from ~50% in 2011. The decline can be attributed to the tough macroeconomic situation in China together with the rapid growth of Renren's online gaming platform. Its future growth can be attributed to two factors: scale and user engagement. Renren had 206 million active users in 2013 and looks poised to cross 215 million by 2014. Moreover, engagement within this user base is growing with users spending more time per month interacting with the platform. This growth in user engagement is driven by the growing number of mobile devices that allow access to the Internet. The company will have to effectively monetize its mobile offerings to drive growth in its advertising segment.
Mobile Advertising to Drive Future Growth
Till the end of 2011, Renren did not generate meaningful revenues from its mobile products. The trend changed in 2012 with about 60% of Renren users accessing the site through mobile devices. Almost 260 million mobile phones were sold in China in 2012 and about half of these were smartphones. More than 100 million 3G subscribers were added in 2012 — the largest number ever. Mobile Internet users account for about 75%, 5% higher than the year before, of the total Chinese netizens, according to the MIIT report. Link to Technode Report
Growth In Social Commerce In China
China Internet Network Information Center estimates that there are approximately 242 million users who shop online currently, a growth of 43% on 2011. Of these 242 million users, approximately 83 million are users of group buying services.
Increasing Online Gaming Spend
Online gamers in China have increased the amount of money they spend online on games and entertainment. This can be attributed to rising disposable incomes in China. We expect a decline in game revenues in 2014 and then a rise as the company launches new games.
Delay In The Launch Of New Android Games in 2013
There has been a delay in the launch of new Android games by Renren in 2013. The company is now expected to release only a few games in 2014. We expect the revenue growth to be slow in this segment in Q3 and Q4 as these new games could take time to ramp up.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
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See more on: DCF Methodology
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