Party Like its 2000 with Microsoft, AOL, Yahoo! and Intel
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Old school Internet stocks such as Microsoft (NASDAQ: MSFT), Intel (NASDAQ: INTC), AOL, and Yahoo! have performed much better than social media newbies such as Facebook (NASDAQ: FB), Groupon (NASDAQ: GRPN) and Zynga (NASDAQ: ZNGA). While all of these companies have share prices far below their peaks during the dot.com boom, Microsoft, Intel, AOL and Yahoo have all stood the proverbial "test of time." Zynga, Groupon and Facebook are not faring so well in this most demanding of matches in just the first year of being publicly traded.
In March 2010, Dallas Mavericks owner Mark Cuban, who made his billions from selling an Internet company to Yahoo!, wrote an article for his blog entitled, "Is Facebook the new internet and how soon before Microsoft tries to buy it?" He concluded his piece with, "Time will tell, but there is no question that Facebook is quickly becoming the biggest threat to the futures of Apple and Google."
In June of this year, Mark Cuban sold his 150,000 shares of Facebook stock, lamenting that, "I already sold it, I took my hit, my thesis was wrong. I thought we would get a quick bounce just about the excitement about the stock. I was wrong, and when you are wrong you don't wait, you just get out. So I took a beating and left." Cuban may have been wrong to buy, but he was certainly right to sell as Facebook is down 26.44% for the last month of market action.
What Microsoft, AOL, Yahoo and Intel all have that Facebook, Zynga and Groupon all lack are barriers-to-entry and an economic moat. About this, Warren Buffett stated, “In business, I look for economic castles protected by unbreachable ‘moats’.” Groupon, Zynga and Facebook have nothing even approaching this: the first clue is that all depend heavily on advertising revenues.
The competitors of Microsoft, Yahoo, AOL and Intel can be readily tallied. Each other, obviously, for Microsoft, AOL and Yahoo! in term of being Internet service providers with search engines, along with Google. For Intel, competitors are among the biggest companies in tech such as Samsung, Texas Instruments, and Applied Materials. You cannot build semi-conductor chips in a dorm room at Harvard.
For Facebook, Groupon and Zynga, virtually everyone is a competitor for advertising dollars. Periodicals such as newspapers and magazines compete, in addition to television and radio stations. The free community weekly takes away business; as do high school newspapers and yearbooks. AOL, Yahoo! and Microsoft all vie for revenues from marketing and public relations, too. This is such a competitive industry that Microsoft just wrote off the $6.2 billion acquisition cost for aQuantive, an online advertising company.
As a comparison, the current market capitalization for Zynga is $2.28 billion. For Groupon, it is $4.90 billion. There is something to be said for having the resources to stay in the race.
There is even more to be said for having the cash flow pay a dividend. Microsoft pays a dividend of around $2.70%. For Intel, the dividend income goes to shareholders at a 3.46% rate. The average dividend yield for a member of the Standard & Poor's 500 Index is around 2%. Facebook, Groupon and Zynga do not pay dividends.
The past year has been a rewarding one for the shareholders of the Internet stalwarts. For the last 52 weeks of market action, Intel is up by 19.36%. The last year of trading has been good for those owning Yahoo! as it has surged by 19.33%. Year to date, Microsoft has risen by16.16%. Over the same period, AOL has soared by 108.74%. Old school Internet stocks have been rewarded more than passing grades by the market.
By contrast, the new social media crowd is failing the test of time. Year to date, Facebook has fallen by 37.98%. Over the same period, Groupon is down by 63.21%. For 2012, Zynga has plunged 67.16%.
There will be survivors from the social media crowd, most likely Facebook, just like there were winners from the dot.com boom. Obviously, these include Microsoft, Intel, Yahoo! and AOL as each posses a formidable economic moat with challenging barriers-to-entry. Those companies have evolved to be profitable despite the vicious competiton on the Internet, rewarding shareholders with double digit, even triple for AOL, gains in recent market action. That is certainly not the case for those owning Facebook, Groupon and Zynga.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Intel, and Microsoft. Motley Fool newsletter services recommend Facebook, Intel, and Microsoft. 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.