Social Media Stocks: The Emperor Has No Clothes, Again?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you paid any attention at all to the stock market at the beginning of the last decade, you could be forgiven for thinking history is repeating itself. Sure, tech stocks know better than to have sock-puppet dogs hawking groceries delivered to your home on bicycle couriers, but there are some major social media IPOs that have left investors cold after their performance on the trading floor didn't live up to their hype. Investors bailed out when they realized they were backing ridiculous business models, and like the child in "The Emperor's New Clothes," they're able to see that social media stocks don't have a stitch on them.
It's hard not to write an article on tech stock meltdowns without mentioning Groupon (NASDAQ: GRPN). The daily deals site recently released its second quarter earnings report. Groupon's total gross billings, or how much money it's actually bringing in to the company from customers, fell to $1.29 billion in the second quarter from $1.35 billion. Groupon went into free fall upon the announcement to under $6 per share.
The stock was priced around $20 for its IPO, and it's been on a down elevator ever since. Groupon blamed a competitive market in Europe for the disappointing performance, but they're optimistic about the future, as if any company is going to predict it is going to fail.
Zynga (NASDAQ: ZNGA) has also suffered a large downhill slide in its value. The creators of "Farmville" and other games that pollute your Facebook feed has suffered some legal trouble. Electronic Arts (NASDAQ: EA) is suing Zynga, claiming one of their games is a rip-off of "The Sims Social." To add injury to insult, the company posted a loss of $22.8 million. Zynga has produced the pet rock of the digital age, and frankly has no business being a public company.
Of course, Facebook (NASDAQ: FB), which Zynga has ridden the coattails of for a long time, has problems of its own. Like any new tech product launch, its IPO was plagued with technical problems that kept its stock out of the hands of investors, causing its stock price to slide. The company has also experienced problems with ad revenue, which is surprising given the large number of people who are logged into the site at any given time, probably when they should be working (or writing posts for The Fool). As of this writing, Facebook's stock is at around $20 per share and falling.
The problem seems to be that since Facebook is so ubiquitous, they've already saturated the market. Online ads don't make a whole lot of money as it is. Plus, Web surfers have a lot more control over the ad experience than TV and radio audiences do. It's possible to do away with ads completely with the right browser add-ons.
So are these sites the equivalent of Pets.com, as CNNMoney said of Groupon? With some businesses, like Zynga, it's completely obvious. On the other hand, observers can only tell a company is doomed in hindsight. In the business world, for better or worse, past performance, even if it doesn't guarantee future success, is still a very good metric for determining which companies are well-dressed and which ones are hoping investors don't notice they're wearing nothing at all.
Fool blogger David Delony has no positions in the stocks mentioned above. The Motley Fool owns shares of 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.If you have questions about this post or the Fool’s blog network, click here for information.