Will the Biggest Social Media Losers Remain the Biggest Winners?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since November 12 the technology heavy NASDAQ has traded with a 3% gain, but during the same period certain social media/internet based companies have traded considerably higher. These are stocks that have been among the biggest losers for most of the year, but are now showing strong gains. Therefore, what is driving these stocks higher? And will these trends continue?

What’s the Catalyst?

Company

Ticker

Since Nov. 12

Since IPO

Facebook

(NASDAQ: FB)

37%

(30.5%)

Zynga

(NASDAQ: ZNGA)

20%

(73%)

Groupon

(NASDAQ: GRPN)

60%

(83%)

 

  • Facebook’s rally actually began on October 24, after the company posted an earnings report that showcased the fact that Facebook is becoming a highly profitable company. The stock has further rallied as analysts have jumped onboard thanks to what looks like a clear strategy to monetize mobile. Then, when you consider that the majority of the company’s large lockup expirations are in the past, and that the last lockup expiration backfired on shorts and day traders, the stock has been rewarded mightily.
  • Much of Zynga’s 20% return has been a result of Facebook, and the connection between the two companies. There are a lot of people who are optimistic of the long-term prospects after the company’s huge management shakeup. These same people are excited about the company’s entrance into mobile, and hoping it can have a Facebook like effect on the company’s top and bottom line.
  • After high profile investments from investors such as Paul Tudor Jones, George Soros, and a near 10% stake by Tiger Global, retail investors are buying under the notion that changes must be occurring at this troubled company. These investments have led to its 60% rally.

Are These Stocks Going Higher?

From a fundamental/valuation point-of-view these are three of the cheapest and most attractive stocks in the social media space. Each company has its fair share of strengths and weaknesses, but the one company that really sets itself apart is Facebook.

Facebook’s biggest concern following its IPO was how to monetize mobile. After several months the company has apparently figured it out, and it has over one billion users to monetize! This gives Facebook the largest platform on earth, and gives the company the flexibility to roll out new services and be successful with those services.

One change I really like at Facebook is that it’s lowering its dependence on Zynga for revenue. Last year it was reported that Facebook received over 10% of its total revenue from Zynga in royalties. Now the company is only returning 7% of its total sales from Zynga, despite flat sales at Zynga, which means that revenue is growing in other segments at Facebook.

In regards to Zynga, it’s a company that looks to have more questions than answers, and is a stock that has been driven higher primarily by the movement of Facebook. Sure, there are changes occurring and it’s entering mobile, but I don’t see a clear cut must have game. Furthermore, the company is losing its relevance because of better gaming options on iTunes.

If you invest with the notion that a stock is a buy just because institutions are buying, or just because George Soros bought, then you are in for a rude awakening. Groupon’s rally has been almost 100% a result of big name buyers at depressed prices. Therefore, I don’t see the fundamental changes to insinuate change at the company, or in its long-term strategy. Besides, George Soros has had a lot of bad public investments as of late, so I wouldn’t use it as proof of the company’s rebirth.

 

A Fool’s Conclusion

If there’s one thing we’ve learned in the last year, it’s that when a social media company begins to fall, it happens fast! Therefore,  when assessing companies in this space it is always good to use a glass half empty mentality, and try to recall the dismay of MySpace.

These companies have very few barriers to entry, and there is always another 19 year old kid sitting in a dorm room with creative talent looking to build on what Groupon, Zynga, or Facebook started. Due to Facebook’s pure presence, I don’t think it is going anywhere, anytime soon. But in regards to Zynga and Groupon, both were high-profile stocks that have fallen, and I see no reason to believe that both rallies were not a result of short covering or a knee jerk reaction to meaningless news. Of course I may be wrong so your own due diligence is required, but I don’t see anything at this time to suggest a long-term fix is in place for either company.


BrianNichols is long FB. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. 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!

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