RENN: Pac Crest Cuts To Hold; Missing Its IPO Promise

Shares of Renren (RENN), known as the “Facebook of China,” are down 28 cents, or 7%, at $3.70 after Pacific Crest’s Evan Wilson today cut his rating on the stock to Sector Perform from Outperform, writing that the company has “so far not lived up to its pre-IPO promises.”

Pacific Crest was one of the company’s underwriters for that IPO in May, when Renren went public at $14 a share. He picked up formal coverage of the name in June. Wilson writes that he had been prevented from commenting on the disappointing Q3 results reported on November 10th. Now that he’s free of his restrictions, he’s cutting estimates drastically for this year and next.

Wilson now sees revenue of $117.7 million and a net loss of 1 cent a share this year, down from a prior view of $121.5 million and a penny profit. For 2012, he now sees $170 million and a five-cent loss per share, down from $200 million and a penny loss.

The company’s competition from other internet startups, including Sina (SINA), which he also rates Sector Perform, and Hong Kong’s Tencent Holdings (700HK), which he rates Outperform, are leading to “margin-busting investments,” writes Wilson, which is not what the company’s road show before the offering suggested.

We had been comfortable with Renren��s spending. Its pursuit of Nuomi and the early stage of the social networking market was a certain guarantee that it would have to spend to remain competitive. This is not a surprise. However, the level of investment is proving to be much greater than management predicted less than a year ago, and the sales that it expects to generate from the investment are now much less.?Much of this spending is clearly in response to the ��great homogenization�� of social networks in China that we have written about previously. The largest Chinese social networks ha! ve all c hanged direction toward the same idea: to become a Face- book/Tumblr hybrid with Twitter functionality. The list includes Tencent��s Pengyou.com and Qzone, SINA��s Weibo, and Renren. Each network comes from different functional origins (except maybe Pengyou and Renren), but the end products are all becoming strikingly similar.?What this means is that each network now appears to have less and less product diffe- rentiation.