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Here's Why Renren Inc. Stock Is Down 19% Today

Jason Hall, The Motley Fool

What happened

Shares of Chinese social-media company Renren Inc. (NYSE: RENN) were down 19% at 2:07 p.m. EST on Jan. 4, after gaining an absurd 76% during the first two trading days of 2018.

So why the big jump preceding today's sell-off? The underperforming Chinese social networking company is set to enter the cryptocurrency fray, having announced it is looking to raise cash with an ICO -- initial coin offering -- along with plans for an "open social network platform based on blockchain." Today's sell-off is very likely profit-taking by traders exiting after big gains the past couple of days.

So what

This isn't the first time Renren has mentioned blockchain and social media in recent press releases, but it's far from clear how (or if) the company will make money from them. Renren announced it was acquiring Trucker Path, a social-media app aimed at professional truckers, in late December; it tossed "blockchain" and even "artificial intelligence" into that release.

A hand reaches for a stack of $100 bills in a rat trap.

Image source: Getty Images.

However, its decision to use an ICO (which happens to be illegal in China, though the company is using its listing on the NYSE to attempt to sidestep Chinese law) is a full-fledged move into the mania that cryptocurrency has become.

Now what

Renren was once expected to be a dominant social-media platform in China, but has fallen to the wayside while Tencent and Weibo have become the dominant players. Despite that lack of success, the company's acquisitions of Trucker Path and load-matching app Truckloads have added 600,000 active users in a specific industry, with prospects for growth. Furthermore, there are likely legitimate benefits of blockchain technology for logistics and transportation users.

But it's still unclear if the company's planned ICO will even happen, especially since it is tied to plans to launch a social-media platform based on blockchain. The Chinese government could clamp down hard on this before it even happens.

The reality is that Renren's big stock jump was almost certainly caused by speculators looking to make a quick buck on anything crypto/blockchain, not the company's actual prospects of growing profits from the moves. In my estimation, the risk of losses far outweighs any chance of greater returns at this point. Until the company can demonstrate it can actually use cryptocurrency and blockchain to make money, I would avoid the stock.

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Jason Hall has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool recommends Weibo. The Motley Fool has a disclosure policy.