Since coming public in 2011, shares of Renren Inc (NYSE:RENN) are down more than 80%. There are four reasons why I believe Renren is an interesting investment at its current price.
Chinese Internet Stocks Gaining Momentum
As shown by the chart below, over the past two months Chinese internet stocks have been on fire. The rally has been spurred, in part, by the $100 billion valuation being placed on Chinese e-commerce giant Alibaba. This valuation figure has helped buoy the stocks of nearly all Chinese internet companies. On a different note, SINA Corp (NASDAQ:SINA) recently announced plans to sell a 18% stake in its Twitter-like platform, Weibo, to Alibaba for $586 million. Taken together, both of these deals have helped make the case for beaten down Chinese internet stocks as value plays.
Despite all the positive sector news, Renren Inc (NYSE:RENN) shares have not surged higher. I expect it is only a matter of time before money finds its way into Renren sending shares higher. In other words, I am looking for Renren to catch up to the moves made by other small Chinese internet plays.
Options Activity
Option Monster reported on the high level of bullish options activity recently: 3,000 October 2.50 calls were purchased. Previous open interest at the strike was just 535 contracts, so this is a new position. The large block trade likely represents institutional money. Institutional money is usually smarter, thus worth following. In summary, the recent options activity points to upside ahead for Renren over the medium term.
User Based Valuation
Currently, Facebook Inc (NASDAQ:FB) has 1.1 billion active users, and the company is valued at $63.5 billion (when this article was written). Based on this, each user is valued at roughly $57 per user. Comparably, Renren Inc (NYSE:RENN) has over 184 million active users and the company is valued at $1.1 billion (when this article was written). Based on this, each user is valued at just under $6 per user. Certainly, Renren is different than Facebook as the company relies more heavily on its gaming and deals segments than its Facebook-like platform. However, I think it is fair to argue that Renren should be worth significantly more based on per user valuation. Renren users need not be valued anywhere close to the $57 per Facebook user, but it is not a stretch to believe valuations can increase significantly from the current $6 per user.
Short Have Covered
About a year ago, short interest in Renren Inc (NYSE:RENN) stood at more than 24 million shares. Without question, the shorts have been right on Renren as shares have moved sharply lower. However, what is worth noting is the fact that shorts have aggressively covered. Currently, short interest in Renren stands at just 3.9 million shares. The profit taking on behalf of short sellers may indicate that the worst is over for Renren. In other words, shorts do not appear to be expecting another major move down.
Possible Takeover
Given Renren’s strong user base I think it is fair to say that Renren is a possible takeover target. This is especially interesting given the recent acquisition spree by large Chinese internet companies. Renren Inc (NYSE:RENN) would be a good fit for either Baidu or Alibaba, the two most dominant Chinese internet companies.
Conclusion
Due to the building momentum in Chinese internet stocks, recent options activity, low valuation per user relative to Facebook, recent short covering, and possibility of a takeover, it is time to buy Renren Inc (NYSE:RENN).
Sammy Pollack has no position in any stocks mentioned. The Motley Fool recommends Facebook and SINA . The Motley Fool owns shares of Facebook.
The article 4 Reasons To Consider Buying This Chinese Internet Stock originally appeared on Fool.com.
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