The Road Ahead for Groupon and Zynga
Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bill Gates, the CEO of Microsoft Inc., wrote a book in 1995 entitled “The Road Ahead.” This book portrayed Gates’ beliefs about the coming of the Internet age and the massive potential and pitfalls for Internet users down the road. Two companies that have utilized the Internet for their business models are Groupon (NASDAQ: GRPN) and Zynga (NASDAQ: ZNGA).
These two internet tech companies used to be darlings of the stock market and the Internet craze, but both Groupon and Zynga have taken a big beating over the duration of 2012. Both companies have been widely criticized for their business models and have had to endure through quite tumultuous times. A recently published Motley Fool article even wondered “Who will be the first to die: Groupon or Zynga?”
The struggles of these two companies pose an important question. Can Groupon and Zynga successfully recover, and if so, who will come up on top? Based on the numbers and the current state of these companies’ respective industries, Zynga is more likely to rebound than Groupon. While both Groupon and Zynga have long roads ahead of them, Zynga has more dimensions of potential revenue to tap into than a rather outdated Groupon.
The Scoop on Groupon
Groupon is a “deal-of-the-day website,” and the company’s business model is centered on providing discounted gift certificates usable at local or national companies. Groupon’s story is an admittedly inspiring story of the American Dream as the company went from a pittance 400 subscribers in 2008 to over 150 million in 2013. But, shares of the company have declined over 80% in value over the past year as investors are panicking over concerns that the company is not able to generate sustainable revenues.
The main issue with Groupon’s business model is that it is reliant on an outdated methodology of revenue generation. Groupon is helpful in finding deals locally and is a good idea in theory. The Groupon model was crafted to drive people to stores or restaurants to spend money, with the hope of customers returning at a later date paying full price. However, companies such as Twitter, Yelp (NYSE: YELP), and Facebook (NASDAQ: FB) have made this model obsolescent. If your product is an innovative product that is useful for consumer needs and desires, people will advertise for you and tell their friends about it on social media networks. Companies no longer have to pay to advertise on Groupon and they also get to charge full price instead of a Groupon gift certificate price. Thus, advertisers on Groupon can circumnavigate the middleman of Groupon.
Yelp’s business model itself is most likely going to be adversely affected by Facebook. Yelp depends on business ratings and reviews, web searching, social networking, and advertising in order to bring in revenues. Facebook’s new “graph search” project basically does all of the things that Yelp does in a different format. However, Yelp has most likely been one of the factors cutting in to Groupon. In fact, research has shown that a Groupon campaign will cut a company’s rating on Yelp, thus adversely affecting a company’s business strategy. Yelp’s reputation and business model, although questionable, is much more likely to succeed than Groupon’s since Yelp is more “modern” in their business tactics by engaging the social media audience.
Groupon can potentially be revived if its business model evolves to include more social interactivity and integration. Facebook is the most-visited website in the world because people want to interact with others. Groupon, therefore, in order to be able to expand, should allow more user-input on Groupon, which will help businesses actually want to advertise on the website. If a coupon/product is given to one person on Facebook who has 300 plus friends, that person can spread the company’s product information on to his friends, who each can have 300 plus friends in their circle, and so on and so forth. But, there is no indication that Groupon is making any steps towards more integration with social networks and is thus missing an opportunity to tap into large markets through the internet. Although the business models of Yelp and Facebook are certainly facing challenges, they are definitely a leg up on Groupon.
The Scoop on Zynga
Zynga is a provider of social game services which develops social games that work as stand-alone games on mobile phone platforms and through its website, Zynga.com. Zynga also provides social networking companies like Facebook and Google with games. Like Groupon, Zynga shares have been thrashed. Zynga shares were originally priced at $10, then rose to $14.50 in March 2012, but then collapsed to an all-time low of $2.09 later in 2012. On March 8, 2013, the stock closed at $3.57.
Zynga has suffered because of a large overreliance on Facebook. However, there are indicators that Zynga is beginning to move away from this dependence and can effectively market itself as an independent social media/entertainment company. Advertising and gaming revenues are most likely going to drive Zynga’s top line forward. Many will choose to expose themselves to video and banner ads rather than pay the $3.99 fee to remove the ads. Also, gamers can buy various upgrades and virtual amenities for their characters in the games they play.
Already the concept of “social gaming” is starting to replace cable television in American households. Social gaming does this by reconnecting consumers with friends in a fun, engaging format. Zynga, if it makes the right moves, can be poised to rise.
A Comparison of the Two Companies
Both Groupon and Zynga shares have significantly declined in value since 2012, but at the start of 2013 both stocks started to make some small short-term gains. Zynga has $1.3 Billion in cash on hand, and generates on average about $899 million a year. Groupon, on the other hand, has missed Wall Street expectations consistently and has faced decreasing revenues. Zynga has been expanding into the international marketplace and commands an impressive platform, while Groupon struggles to make inroads into international markets.
The Bottom Line
While both Groupon and Zynga have long roads ahead of them, Zynga has more dimensions of potential revenue to tap into than a rather outdated Groupon. In the long run, Zynga has more potential to rebound from 2012’s thrashing than Groupon does.
Evan Buck has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of 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!