Editor’s note: This article was first published in December 2012; the share-price falls of Zynga and Groupon since their IPOs and Facebook’s performance against its IPO price are market figures from 30 November and 1 December 2012, and the companies’ later fortunes are not covered.
Tech stocks are losing steam, with two big names leading the losses. Since their IPOs, Zynga has lost a cumulative 74% and Groupon 84.14%: two stocks that looked promising and today are examples of big mistakes in the business world.
At the other end we have the social networking giant, Facebook, a stock that is still 27% down from its IPO price, and of which not much was expected after its disastrous stock market debut. Even so, it is doing its homework and has already gained 55% over the last three months. What is going on with these companies? What can we expect from them?
Zynga
Zynga is an example of anti-diversification, since practically all of its business is on Facebook. It needs the social network for revenue and traffic. This Friday, Zynga announced that certain terms of its partnership with Facebook had changed, and the social network could now create its own games without depending on Zynga.
The news sent Zynga down 6% in today’s session, because its business is starting to raise serious doubts. If it doesn’t find other, alternative sources of revenue, the day Facebook does without Zynga, the shares will be worth practically zero dollars, and that is a risk that is currently weighing on investors’ minds.
Groupon
Groupon is an example of poor company management. Its business model is starting to be seriously questioned because, although it generates considerable revenue, that revenue never quite turns into profit.
Investors are picking up on the real problem: the company’s three founders have been overwhelmed by their success and are unable to build a structure that makes the company profitable. Most US research firms are warning investors to be careful about buying into this company, because you are investing in a company with huge growth potential, but run by three founders who are incompetent at running the business. Doubts are already arising about whether the company will survive in the medium term, unless someone buys it or its founders manage to hire a capable person to run it.
That is why we usually advise that, when investing in a company, you need to know both the company’s accounts and the person in charge.
As we said last week, investors are starting to like Facebook. The social network has begun to show that it can grow its revenue, as well as generate new revenue from mobile. It is an example of constant innovation and change (too much for my taste).
More advertising on the platform, more ways of reaching large numbers of users thanks to promoted posts, and so on. Facebook could develop a business based on discount coupons tomorrow and finish off Groupon, just as it could develop its own games and wipe out Zynga.
Its position is absolutely dominant in “its market”. But watch out, because other analysts look beyond what the market sees: Facebook can increase its revenue thanks to its users, but what would happen if the social network made the mistake of spoiling the user experience? Or users might simply, in the medium to long term, start to tire of sharing their lives on Facebook, a platform that is trying to turn itself into a shopping mall.
Nor can we rule out WhatsApp ending up as the new social network, since this service would have no trouble making the move to mobile, given that it started on mobile. Anything can happen with Facebook, so although it may meet the market’s expectations in the short term, in the long term it could turn out to be an investment as profitable as it is risky.
Featured image: Steven Damron, CC BY 2.0, via Flickr.
