A Better Way to Profit from the Social-Networking Craze

Whether or not you’re one of the estimated 526 million people who use Facebook on a daily basis, you simply can’t ignore the fact that it generates more than 3 billion “likes” and comments on a daily basis.

Social networking is clearly ingrained in our culture. So, it would make sense to invest in this seemingly unstoppable trend, right?

Not so fast. There are many reasons why investing in this hot IPO may NOT provide the direct line to profits that many of its early investors are anticipating.

Even though this U.S.-based site is used worldwide, there’s a better way to tap into social media’s reach to access a wealth of opportunities overseas. Today I’ll show you why ... and give you the name of a company that offers a real growth story — one you might find too good not to “share”!

Facebook Earnings: Not Much to ‘Like’

Even though Facebook is still technically a “private” company — as it should float its IPO sometime in the last half of May — it does have to disclose its financial information to the Securities & Exchange Commission between now and the time it sells its IPO.

The company just reported its first-quarter results, updated its S-1 pre-IPO paperwork, and gave investors an advance peek of how blazing-fast it is growing its business. However, the Facebook numbers I saw were ... well ... uninspiring.

To put it into Facebook-friendly terms, I’d hit the “dislike” button on the company’s earnings ... if one existed, of course. To me, its newest figures were a clear sign that the company isn’t growing nearly as fast as it once was. Here’s what I mean.

  • First, Facebook was able to grow its revenue in the first three months of the year to $1.06 billion, a 45% year-over-year increase compared with the first quarter of 2011. Moreover, 45% may sound like a lot but it is a FRACTION of the growth that Facebook enjoyed in 2011 and 2010, at 88% and 154% respectively.
  • What didn’t get a lot of attention was the news that revenues actually DROPPED by 6.5% from the fourth quarter of 2011. Facebook blamed that drop on “seasonal trends” but that is a hollow excuse.
  • Profit growth was even uglier, FALLING by 12% to $205 million compared to the $233 million it earned a year earlier.
  • One of the key, critical metrics is the average revenue per user, or ARPU, because it tells you how effective Facebook is at turning its members into revenue-producing customers. An eyeball or page view doesn’t mean squat unless advertisers are willing to pay money to reach them. Sadly, Facebook reported a 6% year-over-year increase and yet a very disappointing 12% DECLINE from the fourth quarter of 2011.
  • Growing sales is one thing. Keeping a tight lid on expenses is another thing, as snowballing costs are often what kills companies that grow too fast. Facebook reported a gigantic increase in expenses, rising from $343 million in Q1 of last year to $677 million this quarter. That’s nearly double the expenses!

Plain and simple, those numbers are awful, especially given the IPO on the very near horizon. You can bet your boots that the people running Facebook were doing everything legally possible to goose their numbers and make their company look as bright and shiny and pretty as possible.

In short, producing a blowout first quarter of 2012 was its top priority ... and these mediocre numbers were the best they could do?

And that’s the good news for the past quarter, unfortunately.

Instagram Acquisition: Picture-Perfect or Out-of-Focus?

Don’t forget about Facebook’s decision to pay $1 BILLION for a 13-person company with practically no revenues. Its Instagram purchase strikes me as insane and bubble-esque in a dot-com sort of way.

Instagram claims 30 million registered users ... but it is a free application, is NOT ad-supported and has no revenue stream at all.

There is no way that a mobile app where you just take a photo and share it can be worth that much. Worse, it makes me worry that Facebook’s management may squander its IPO billions on other dumb acquisitions.

Oh, and Facebook issued another 23 million new shares to fund the Instagram purchase. Can you say “shareholder dilution?”

Might This Free Service Cost Even Early Investors Dearly?

Lastly, Facebook is incredibly expensive. If you use the valuation that Facebook itself used to pay for Instagram, you come up with a market cap of $104 billion. If you then annualize the most-recent quarterly net income of $233 million, you come up with a price-to-earnings ratio of 89-to-1.

Yup, a P/E of 89.

To give you some perspective, Google (Google) and Apple (AAPL) are selling for 18 and 17 times earnings, respectively.

Facebook ad revenue is falling off a cliff.

No question, Facebook is extremely expensive, especially given the slowdown in sales and profits.

Given that, I suspect that Facebook will enjoy a nice jump after it goes public. The hot-money crowd is always looking for the newest rocket ship, and Facebook will attract the momentum money like moths to a flame.

Could it already be too late for a Facebook investment to pay off, before you make it?

There’s a less-expensive investment route you can travel, with more available upside to play the social-media space. Best of all, it’s in a market that’s far-less-saturated, but one that’s set to follow in its western counterpart’s very big footsteps.

Plus, you don’t have to wait for the early investors to take first crack at it — it’s already available to trade!

Forget the Facebook IPO; Tap into the ‘Facebook of China’ Instead

Who’s to say if Facebook will flame out later, but there is no question in my mind that there are better ways to profit from the booming social-networking craze.

And here is where Asia comes in.

I’m talking about Renren Inc., a Chinese social networking Web site that is essentially the “Facebook of China.”

Renren is a Chinese operator of a social-networking platform that enables users to communicate and share information. It is more than just a social-networking site; it also has a video-sharing Web site 56.com, a leading social commerce site Nuomi.com, and an online games center.

Renren is just like Facebook, but better in a couple ways.

  • It has a market cap of $2 billion, which is peanuts when compared to Facebook’s anticipated valuation of $100 billion. Renren simply has more upside.

Facebook's massive user growth shows signs of slowing. (Source: Minyanville.com)

  • Renren pulled in $120 million in revenues in 2011 versus $3.8 billion for Facebook. While Renren is not as big as Facebook, it certainly has more room to rise, as Chinese social-media growth is much stronger than social-media growth in developed nations where Facebook operates.
  • Renren grew from 110 million active users at the end of 2010 to 147 million active users at the end of 2011. That’s a 33% year-over-year increase in active users, which happens to be identical to Facebook’s growth.
  • Renren is trading in the low-$6 range which gives it a P/E of 45. Expensive, right? Yes, but as I said above, Facebook is selling for almost double the valuation at 89 times earnings.
  • The company has $1.2 billion, or $3.05 a share, in cash — about half of the current share price. If you back out that cash, the entire company is being valued at an extremely cheap $1 billion.

By almost every measure, Renren is just a better value than Facebook.

Renren, by the way, is traded here in the United States under the ticker symbol RENN.

Now, I’m not suggesting that you rush out and buy Renren tomorrow morning or buy Facebook after it goes public. As always, timing is everything so I recommend that you wait for my buy signal in Asia Stock Alert.

There is, however, a bundle of money to be made from the social-networking bonanza. Both stocks are very worth your attention — and, depending on the stock, perhaps also your money.

Best wishes,

Tony

P.S. My Asia Stock Alert members were up on 8 of the 9 trades they closed so far in 2012. I’m not talking wimpy returns — they just closed out a position for up to a 226% return, and this came shortly after closing out a $200 gain in just seven months! See how individual companies are profiting from Asia, and how you can too, by clicking here now!


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Posted 05-04-2012 10:56 AM by Tony Sagami
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