RenRen shares declining: an omen to a Chinese Internet bubble?

Social networking site Renren, China’s Facebook clone so to speak, went public last week and it lured investors despite the big risks. In recent news, shares of the social networking site have lost nearly all the gains made since debut, and were trading down 8 percent.

According to a Reuters report, RenRen stocks, which surged 24 percent during the first week of its New York Stock Exchange debut at $14, started a series of decline daily beginning May 5 losing 6.33 percent, 0.41 percent, and 4.58 percent respectively.

Morningstar IPO strategist Bill Buhr identified two issues that may have caused the decline. He told Reuters:

“The issue is two-fold: first you have these lingering accounting concerns that are increasingly troubling as more and more investors peel back the layers on Renren and do some additional due diligence. Secondly, this is a business — Internet and content — that the Chinese government could at some point either attempt to regulate, or flat-out censor, which would diminish the value of Renren’s product and content offering almost immediately.”

These are two solid points. Even before the IPO was filed, these issues were already raised among others such as the uncertainty in the real number of subscribers and intellectual property concerns.

Similarly, NetQin, which filed for an IPO days after RenRen, also experienced a plunge in stock price, dropping 19% to $9.3 per share from its IPO price of $11.5 immediately after its debut.

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With several Chinese firms eager to follow suit, this should serve as a warning sign not necessarily to dismiss the idea of an IPO but more of being cautious to avoid a Chinese dot-com bubble, given analyst predictions that “the scarcity of NYSE listed Chinese stocks will diminish as more Chinese Internet companies go public in the US, lowering IPO prices in the future.”