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Renren, China’s Facebook, sells shares on NYSE

But amid murky numbers and dubious accomplishments, is it really worth billions?

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This map shows the density of Facebook friendships. The dark area north east of India is China, where Facebook is banned. Meanwhile, Renren, a Chinese version of the social networking site, is raising a fortune on Wall Street. (Karen Bleier/AFP/Getty Images)

BOSTON — Renren, China’s biggest social networking site, beat Facebook to the market yesterday, becoming the first such web service to sell its shares on Wall Street.

Investors have gone wild for Renren. Its initial public offering raised $743 million on May 3 — valuing the company, which is not yet profitable, in excess of $5 billion.

That means Renren is worth more than 72 times its 2010 sales according to Bloomberg, a sharp premium over Facebook. So far, private investors who have bought shares of Facebook have paid about 25 times 2010 revenues.

Still, Wall Street wasn’t phased by the steep price. The following morning, its shares soared as much as 71 percent.

Renren’s astronomical price could mean a few things. One possibility is that investors think Renren has greater growth potential than Facebook. Another is that Facebook has been selling its shares for too little. Or the billions chasing Renren could signal irrational exuberance.

There’s reason to expect the latter. For all its promise, Renren appears to be a risky investment. Its rollout was steeped in controversy and murkiness, and its high price may have more to do with fad than fact.

Most worryingly, the company seems prone to exaggerating its accomplishments. In official investment documents filed with the Securities and Exchange Commission, it first stated that 131 million users had activated its service. Later, Renren knocked a cool 100 million off that number, disclosing that only 31 million logon to the service at least once a month, according to the Financial Times.

Either way, the site is still relatively small by network standards, and is clearly struggling with user engagement, a critical challenge on the internet. Facebook, in comparison, says that half its users visit daily, with some 250 million accessing the site via mobile devices.

Renren has also struggled in reporting exactly how quickly it is growing. 

It initially stated that it added 7 million users in the first quarter of 2011. Executives later clarified that the number was really 5 million. That reduced its quarterly growth rate from 29 percent to 19 percent. Compare that to Facebook, which doubled in size, from 250 million in July 2009 to 500 million in July 2010.

For Renren, growth is a key factor, considering its size, steep price and the fact that the company still loses money — $64.2 million in 2010 and $70.1 million in 2009.

Adding to the confusion, the head of Renren’s audit panel resigned just days before its stock listed. The executive, Derek Palaschuk, removed himself from Renren’s board after a research firm characterized the performance of Longtop Financial Technologies (NYSE: LFT), as “too good to be true.” In his day job, Palaschuk serves as Longtop’s chief financial officer.

One advantage that Renren has is that, for now, it doesn’t have to compete with Facebook, which is blocked in China. That means Renren is the biggest player in the world’s largest internet market, while the Palo Alto-based global behemoth is forced to watch from the sidelines. (Incidentally, Bloomberg Business Week questions the fairness of Renren tapping U.S. financial markets while Facebook is banned from China’s internet.)