Will Zynga, Facebook, and LinkedIn Exist in One Year?
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Social networking companies have been extremely volatile over the past couple of years. The high profile failure of Facebook’s (NASDAQ: FB) IPO and Zynga’s (NASDAQ: ZNGA) decline of epic proportions have implanted this negative perception around web companies. LinkedIn (NYSE: LNKD), however, bucks the trend.
Stock performance and outlook
Facebook has been a tough ride. Over the past 14 months, LinkedIn has outperformed by rallying 81.18%, while Facebook declined by 36.70%. Zynga did the worst of the three, declining by 59.71%.
Industry statistics are showing that global demand for social networking services is on the rise.
According to eMarketer, the number of social network users will grow to 1.73 billion in 2013. By the end of the year, one in four people will use a social networking site. People have a variety of social networking accounts, but the networks that are likely to dominate are Facebook and LinkedIn. EMarketer also predicts that social network user bases will grow at double digits until 2015 across the world. By 2017, the same company estimates that there will be 2.55 billion social network users.
LinkedIn is a winner
LinkedIn has a lot of potential, and that's no exaggeration. We are not talking value, and we don’t care about dividends. When an investor is buying the stock, the only thing that’s on that person’s mind is the rate of growth.
In its most recent quarter, the company grew its net income by 352% year-over-year. This growth in net income was accompanied by a 72% year-over-year growth in revenue. The growth in both revenue and net income clearly indicate that this stock is a real growth investment.
Analysts on a consensus basis believe that the company will grow its earnings by 64% in the current fiscal year. It is also expected to grow earnings by 43.8% in the following fiscal year. The company has reported significant year-over-year and quarter-over-quarter growth in membership, unique visitors, and page views. This is why the stock grew so significantly.
Going forward, I anticipate the company to grow its net income due to increasing demand, improving contribution margin (marginal profit per user), and international expansion. Analysts on a consensus basis project that the company will grow its earnings by 58.43% on average over the next five years.
Know what to look for in Facebook
This company can be an extremely difficult stock to recommend. On one hand, it thrives in a positive business environment (social network user base will grow in double digits). We cannot deny the strength of having one million users on the social network. Going forward, the company’s revenue growth should stay above a 20% rate.
What concerns most investors is the exponential increase in spending that has led to high-profile failures like Facebook Home and Facebook phone. LinkedIn comparatively has highly logical product extensions, such as memberships and job recruitment services. Over at Facebook it is still all about the ads.
The advertising-driven business model weakens when we consider that a Facebook mobile ad is displayed on a four inch screen. There is always the potential of advertising in user's newsfeeds, but it depends on how much risk Facebook is willing to take. Overly monetizing the social network could do more harm than good.
The company will push a lot of products out of its research labs over the next five years. Many of them will fail financially, but some of them will stick around and turn into something that can be monetized.
In the worst case scenario that every product Facebook develops is a failure, the company could resort to cutting costs while revenue grows. This would grow the company's earnings.
I have no idea how fast Facebook will grow its revenues. Analysts estimate that revenues will grow by 32.10% in 2013, and followed by 26.40% growth in the 2014 fiscal year. This growth is based purely on the company's advertising business. We have no way of knowing the effects of product extensions and new products, however. For all we know, Facebook could develop a ground-breaking product that would alter outwards looking forecasts significantly.
This is a stock that appeals to growth investors only.
Zynga is a train wreck
No one on Wall Street believes the stock will turn around in 2013. Zynga’s biggest problem is that its user engagement statistics have been on a consistent downtrend. This is compounded by a lack of imagination in game development. It took me less than an hour to get bored with CityVille, and no I didn't buy any in-game cash.
Mark Pincus, the CEO of Zynga, believes that it is in the middle of a transition year. He is banking heavily on mobile as its next frontier. Every game that Zynga develops hits a saturation point. The barrier of entry for developing games on the mobile platforms is almost non-existent; almost any independent group of app developers can create games that are similar to Zynga's.
To add insult to injury, analysts are projecting that the company will report a 27.60% decline in sales year-over-year. The hoped-for outcome is that the company is able to turn around the Titanic at 80 mph. This is the complete opposite of a growth stock. We are talking about a value investment that has a higher probability of failing, and therefore investors should avoid the stock.
LinkedIn has the clearest growth strategy of the three companies. It has both revenue, and net income growth. LinkedIn grew its business with logical product extension, and international expansion. The company is the most superior investment of the three.
Facebook needs some work. Facebook is heavily dependent on new product ideas for growth, but if it fails at that, it can always cut costs. Making it a reasonable investment opportunity.
I would avoid Zynga, because user engagement levels are on a consistent down-trend. The company's product strategy is failing in the market place. Distributing the games on an alternative platform like mobile will not generate any substantial improvement in demand.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!