The omen: the sad decline of “China’s Facebook” shows why you should avoid the IPO of “China’s Twitter”

Sina Weibo, often heralded as China’s answer to Twitter, will soon IPO in the US [1]. It’s a good chance for investors around the world to get a slice of the social network that’s the hive mind and collective voice of China’s web users. But it’s not as simple as that.

If you look back to the spring of 2011, China’s biggest social media IPO to date gives us an omen of what could very well happen with Weibo. In May 2011, Renren (NYSE:RENN) – hailed as “China’s Facebook” – hit the New York Stock Exchange with shares that ended the first day’s trading valued at $16.80. But then reality hit.

By the end of its first year, Renren stock was below $4. And it never recovered. It’s now at $3.30. There were ample warning signs – the horizon was filled with red flags. And all those flags were adorned with a Weibo logo.

Weibo was already whipping Renren

By the time Renren opened to investors, Sina Weibo had already surpassed Renren as China’s most talked about social network. Weibo had fewer registered users than Renren at the time (about 75 million registered to Weibo, versus 117 million signed up for Renren), but Weibo had a lot of traction back then. Renren’s core users, China’s young urbanites and emerging middle class, were moving from Renren to Sina Weibo for a lively mix of news and personal commentary.

Brands were shifting their ad money from Renren to Sina Weibo too. One month before Renren’s IPO, we wrote, “Sina Weibo appears to be the social media platform of choice for most brands to stage their engagement with consumers in China, whilst fewer brands have exploited the potential of Renren.”

These weren’t subtle and hard-to-detect signals that Renren was being overtaken – it was clear to everyone in China, and it should have been obvious to any overseas investor who was paying proper attention.

Now it’s the spring of 2014, and it’s time for Sina Weibo’s IPO. The trouble is that Weibo’s listing is surrounded by an even larger flock of red flags.

And now WeChat is already strangling Weibo

Weibo’s mobile app

This time around, it’s even more obvious that a new challenger has emerged and is close to winning. Sina Weibo is being passed by WeChat, the messaging app made by Tencent (HKG:0700). While both apps can co-exist, that should tell potential Weibo investors a lot.

(See: Tencent versus Alibaba: a complete guide to an increasingly fierce rivalry – INFOGRAPHIC)

WeChat is a huge threat not just because of its numbers – 355 million active users versus 129 million active on Sina Weibo – but because it does much more than messaging. For many Chinese people, WeChat is now the preferred way to follow celebrities and brands, read and share news, and view Facebook-style updates and photo albums from friends. Tencent is also taking WeChat – again, initially just for its Chinese users, not those overseas – into new areas like mobile commerce and epayments, so that it can become even more ubiquitous as a sort of ewallet app.

That makes Weibo’s IPO an investment in a social site that’s past its peak.

But Weibo still has some bite