Two Pricings and a Shellacking

The two most attractive deals in marketing, Renren and RPX, priced this week and traded up sharply but not insanely. Just before pricing a sharply negative report came out on Sky-mobi which had more than doubled from their IPO price just 5 months ago. This post deals with these three issues in more detail.


First of all, Renren (NASDAQ: RENN) created a stir as the “Chinese Facebook” but took a step back by having to revise downward some of their user figures while in marketing. The IPO was priced at the high end of the range ($14) rather than above the range and traded at $18-19 in the aftermarket.


Our special agent/intern Lin Yuan has done a little work on Renren and points out some of the opportunities and threats the company has.

 

The positives:

  • Renren is the biggest and leading site in China for social networking, and is also targeting other major use cases, such as professional networking (for example LinkedIn) with Jingwei.com and group discounts (for example GroupOn) with Nuomi.com.
  • China is just huge and for now at least Facebook is blocked there. So hundreds of millions of users (and ultimately billions) are up for grabs in an economy that will represent much of the global incremental growth for the next few decades. It’s simply too large to ignore.
  • The management team is stronger than most and has a mix of both Chinese and US experience and background. This tends to make for better performance, and more importantly greater affinity with US investors who take comfort in feeling like they understand management.

There are some credible threats:

  • Competition is not sleeping. A major direct competitor (Kaixin.com) has also filed for an IPO and we all know that social networking is still in formative stages. Sina Weibo (like a Chinese version of Twitter) has done very well, and represents another way for people to network and lessen their dependence on Renren. (Investors might take a look at Sina (NASDAQ: SINA) which has doubled YTD to reach a $7B+ market capitalization.) Lastly, Facebook may eventually get into China. When that will happen, on what terms, and to what effect, we don’t know.
  • It’s too early to know if Renren’s expansion efforts into the other segments of the market (LinkedIn and GroupOn) will be successful. Trying to be too much to too many could challenge the company and the management team, and cause them to overreach.
  • Users in China are already finding that updating multiple services is a challenge. We expect to see “meta” services like HootSuite and Seesmic show up in China to address these pain points. This could represent another competitive battleground for Renren and the other companies to face.

At these prices we have decided to add some shares to the IPO Candy Folio. There could be some correction coming in the shares of Chinese technology names (it’s hard to know), but companies with a solid franchise there are attractive. For our Toffee subscribers (paying) we have posted both a transcript of the IPO roadshow and the slides to our Roadshow Archive folder. (The transcript is available for individual purchase at this website also.)


RPX (NASDAQ: RPXC) is another recent IPO we really like and will be following fairly closely. RPX is the first constructive way we have found to plan the lamentable patent and IP situation many companies face every day. The problem companies face is significant and there have been few, if any, innovative approaches to solving it. RPX offers companies a way to manage this risk and more effectively deal with patent and IP conflicts without lawsuits. So far, the other way to play this opportunity has been with Acacia (NASDAQ: ACTG), which has rocked up about 400% in the last year and is trading near a 52-week high with a $1.6B market capitalization.


Here are a few key points on RPX:

  • There are at least 2,000 companies that spend millions a year on patent management, disputes and litigation. RPX had 72 clients in 2010 and posted $95m in revenue. It’s not hard to do the math to appreciate that RPX can be a significant company in terms of revenues and profitability (they also did $15m in non-GAAP net income in 2010).
  • Non-performing Entities (aka “patent trolls”) have emerged to basically sue large companies to try and force settlements and licensing of patents they have in their large and growing portfolios. RPX acquires patents in the open market on behalf of their clients to protect their initiatives and reduce future litigation and settlement costs.
  • RPX also provides a third party mechanism for companies to “syndicate” the purchase and subsequent use of patents. They often share patents today but it typically comes at the end of a long and expensive litigation process. Now it can be done up front.
  • The company has a subscription model which provides some revenue visibility. However, their costs can vary considerably from quarter to quarter due to their patent purchasing activity. It makes business sense but it will be interesting to see how “the street” handles this model for a public company.

RPX has held up much better than Renren post pricing. The stock opened at $24 and remains around that level today. We’re adding a little to our IPO Candy Folio with the hope that quarterly fluctuations might give us some better entry points to create a larger position.

Last and possibly least we saw another Chinese technology company in the mobile space, Sky-mobi (NASDAQ: MOBI), take a huge fall as infamous stock shorter and writer Citron Research put out a scathing analysis of the company. We eliminated the stock from the IPO Candy Folio as soon as the word was out because we know how much damage the Citron reports can do. We think there’s still a positive story and investment opportunity here so we will be revisiting the facts to see if we may be able to exploit the situation. Until we get clarity we will leave Sky-mobi out of the portfolio. It’s been a great performer for us, however, even with the major recent pullback. Happy and careful investing to all!

[Disclosures: none]

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