Jiayuan.com Flirting With Disaster

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Jiayuan.com ( DATE) is a very popular online dating site in China with over 40 million users. However, like most of the Chinese Internet space, the shares have been pummeled recently, falling by more than 70% from 2011 highs. I believe that shares have at least 50% more downside, with limited catalysts for any upside movement. As a result I am short the stock.

A good comparison is RenRen ( RENN), which many investors felt would bottom out at around $5.00. Despite having over $1.2 billion in cash, RENN now trades at just over $3.00, with a market cap roughly equal to the cash it has on its balance sheet. Effectively, investors are valuing the entire business of RENN at roughly zero.

On Dec. 21, DATE hit an all-time low of $5.50, prompting management to announce a share buyback program of up to $10 million. The share price immediately jumped as much as 20% to over $6.50. However, the initial enthusiasm has proven to be short lived and the share price has drifted back down to the $5 to $6 range once again.

Buybacks in the China space have a mixed track record, although companies continue to announce them whenever their stock hits a significant low. The most recent example is Qihu360 ( QIHU). The company announced a $50 million buyback program once its stock broke below its 2011 IPO price. QIHU's stock rose 4%.

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After a company announces a buyback program, there are still several uncertainties. Will the company actually go ahead and buy back stock under the program? How will investors perceive the buyback as a use of cash? Will the added buying prove to provide more than just a temporary bump up in the share price? So far I have yet to see a buyback of shares provide long-lasting benefit to the share price once negative sentiment has already set in. As a result, in my opinion, a buyback is typically a poor use of the company's precious cash.

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