4 Reasons To Consider Buying This Chinese Internet Stock

Sammy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

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 (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.

<img alt="" src="http://media.ycharts.com/charts/c0955dbe5d9816b898ba3d0901f52df4.png" />

SINA data by YCharts

Despite all the positive sector news, Renren 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 (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 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 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 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.

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Sammy Pollack has no position in any stocks mentioned. The Motley Fool recommends Facebook and SINA . The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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