Should Baidu Follow Renren This Time?

By Markets

Image source: Baidu.

Continue Reading Below

Shares ofRenren (NYSE: RENN)soared 11% last week, and the big reason for the pop in the stock is the Chinese social networking website operator's earlier decision to spin off its social video platform. The market's excited about the prospects of valuing the struggling dot-com's parts instead of the sum of its parts.

Renren's plan is to combine -- the social video site -- and most of its minority stake investments in privately held companies into a stand-alone company. Woxiu is a platform where musicians and other performers can live-stream their shows. It is free for use, but fans can buy virtual items to support the artists. Users can also pay for premium features that enhance the experience.

If a Chinese Internet company looking to move a popular yet money-draining video hub sounds familiar it's because this is the scenario that seemed to be playing out earlier this year with the more prolific Baidu (NASDAQ: BIDU). China's leading search engine seemed as if it had a clear path to unload its own video-streaming operations, but then activists got in the way.

If at first you don't suck seed capital ...

Baidu insiders including founder CEO Robin Li seemed to have a deal in place to take majority-owned iQiyi off of Baidu's books back in February. The deal would've valued the video-streaming hotbed at a cool $2.8 billion. Baidu's 80.5% stake would've worked out to a $2.25 billion pre-tax infusion.

Continue Reading Below

The market initially applauded the move. Baidu's flagship search business continues to be a juicy money maker, but margins have been squeezed at the dot-com darling as a result of its diversification into other areas including iQiyi that aren't paying off on the bottom line right away. Handing over iQiyi would've fortified Baidu's already healthy cash balance, but it also would've improved its reported profitability.

The transaction seemed to be a sure thing until hedge fund operatorAcacia Partners wrote an open letter to Baidu, objecting to the deal. Acacia argued that iQiyi's closest rival, Youku Tudou, had been acquired in a deal valued at $4.8 billion just a couple of months earlier. Facing activist pressure, Li and his group called off the proposed purchase.

The market rallying around Renren taking a different tact to cash in on its video platform may seem familiar, and it may even reawaken calls for Baidu to once again explore its options with iQiyi. However, investors need to keep in mind that Renren and Baidu are worlds apart in so many ways.

On the outside looking in

Renren may have posted 39% year-over-year revenue growth in its latest quarter, but the growth stems entirely from the profit-slurping online financing business that it's been getting behind. Renren's now offering consumer financing and auto loans, and that's padding top-line results without helping on the bottom line. Its original social networking site continues to fade in popularity. It was down to just 35 million monthly unique log-ins in June, well below the 45 million users logging in a year earlier. Business has gone south since peaking in 2012, and the stock has followed suit.

The market's positive reaction to Renren's move is happening because the forgotten Chinese dot-com is shaking things up, giving it a new shot. The stock has been a disaster, trading 84% below its 2011 IPO price of $14. It's actually trading below book value. Renren is packing nearly $1 billion in cash, restricted cash, and short- and long-term investments on its balance sheet. Back out Renren's $229 million in short- and long-term debt and you have a stock that's selling for little more than its net cash position. A 10% move is not a material sum in that scenario, and it's a different world for Baidu where that would represent a better than $6 billion pop.

Baidu may want to explore spinning off iQiyi, and the activists better hope that it would be worth more than $2.8 billion in that scenario. However, you can't compare one fallen stock's catalyst to what may or may not help Baidu. There's value to be unlocked in Baidu's assets, and a spin-off may be the best solution but it's certainly not its only option.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. 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.