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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, which it licenses from third party developers.
Payments On Virtual Goods
Online gaming revenues constituted 45% of Renren's total revenues in 2014. 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. In 2014, it shut down its game development division. This is expected weigh on the revenue growth as the company now needs to license and market games aggressively to compete effectively in this market.
Text And Display Ads
Online Advertising amounted to $27 million in 2014, down 35% from 2013. The decline can be attributed to the tough macroeconomic situation in China, the challenges faced by the company in monetization and the nearly stagnant user base of renren. These issues are likely to persist going ahead because its key rival Tencent WeChat has been rapidly increasing its user base, from an average monthly user count of 355 million in 2013 to 500 million in 2014. Renren has been able to grow it only from 45 to 46 million. In terms of monetization, its average revenue per user fell from 21 cents in 2013 to 12 cents in 2014.
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.
In 2014, over 90% of the users were accessing Renren's platform through mobile devices. Monetization of this user base is proving difficult because innovation in that regard at Renren is not happening as fast as the company's management would like.
Gaming Revenues At Risk
Renren has halted in house development of games, choosing instead to become a publisher of third party studio's games. This affected the revenues in 2014 as the transition led to a scarcity of new games. In 2015, unless the company can license high quality games that capture user interest, the gaming revenues may decline further.
Decreasing Returns To Scale From User Base
The increase in the number of Internet users from China is likely to come from the poorer sections of society. Already, a quarter of the Internet users in China make less than 1000 yuan, approximately $160, per month. If the new users are drawn predominantly from low income categories, then the revenue increase in response to an expanding user base will be muted.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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