As Phony As a Two Dollar Stock

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

How the mighty have fallen! Groupon (NASDAQ: GRPN), Zynga (NASDAQ: ZNGA), and Glu Mobile (NASDAQ: GLUU) are all two dollar and change stocks. The worst percentage loser is Groupon, down nearly 90% from its IPO price on November 4, 2011. Don't be tempted to buy into these for a dead cat bounce. There used to be an expression "as phony as a two dollar bill," and these are just value traps.

Groupon Disappoints

Groupon reported absolutely miserable Q3 earnings on November 8. They reported a loss of $2.98 million versus $54.2 million a year ago and  -$0.00 per share in earnings. This was still better than the -$0.18 EPS loss year over year. Street expectations were for a gain of $0.03 a share. They also disappointed in terms of their own last quarter guidance which was for over $580 million in Q3; they only earned $568.6 million.

Their one bright spot was that Groupon Goods sales were up 26%. The company has been trying to cut costs and slashed headcount by over 900 and spending on marketing. Revenues increased domestically by over 80% but revenue growth in Europe was only low single digits.

Is there any reason at all to be in the stock? Active customer growth is slowing. Despite initiatives like iPad apps for restaurants, Groupon Payments, Scheduler, and a small business loyalty program, the plain fact is that the business model is too easy to replicate. The company has said it may move into search and guided for Q4 revenues at or above $625 million.

What About Zynga?

It just hit a 52-week low of $2.09 on November 9. Zynga reported on October 25 and the numbers were better than expected only because analysts expected the loss of -$0.03 a share to be much larger. Right now the P/E stands at -0.89. Despite job cuts, dropping unpopular games, and acquiring small game companies that attract their most ardent gamers (they announced the purchase of November Software on the 9th), is it all enough? Any diehards left in the stock are hanging their hopes on a real money gambling platform.

Their ties to Facebook are becoming ever more ephemeral as both drift apart. Zynga can hardly afford giving up the 12% they add to Facebook's top line. Just recently, CEO Marc Pincus said at a tech conference all new Zynga games will have mobile elements. Zynga could certainly spend more money for more games but the real problem is similar to Groupon's. There are just too many games out there. How to attract gamers and turn them into active paying users is something the entire gaming industry would love to know.

Is GLU Sticky Enough?

Poor Glu Mobile also hit a 52-week low of $2.17 on November 9. It also has a negative P/E of -0.37. Glu Mobile didn't fall as far as Zynga or Groupon percentagewise but is down considerably from its 52-week high of $5.90. Glu Mobile has a forward P/E though of 38 and while it's very small with only total cash of $24 million it has no debt.

Glu just reported on November 1 and lowered guidance for the next quarter, the all-important holiday quarter. But Glu Mobile just poached Matt Richetti from Kabam to oversee the game design studio as President of Studios. They are also delaying some five new games while they work to further monetize their current portfolio. The most interesting part of the earnings press release was this:

  • "Our non-GAAP smartphone revenue of $18.3 million grew 73% from Q3 2011 and was 86% of total non-GAAP revenue."
  • "Our non-GAAP freemium revenue (micro-transactions, in-game advertising and offers) grew 103% to $16.5 million compared to $8.1 million in Q3 2011."

Glu Mobile is better positioned than Zynga despite its size to monetize mobile especially with its purchase of Game Spy. Active daily users actually grew from July to September. Although it was incorporated in 2001, this is still a very small company and more likely to be bought out at some point. If not bought out, this company will soldier on and it's a more interesting name than the other two.

The Payoff

According to game design theory, after all the challenges and obstacles there has to be a payoff or why would anyone play? In Groupon's case, the payoff may never come unless drastic measures are taken. Unless they revise their entire business model and morph into something else like search, this is just the tip of the iceberg. As for Zynga, shareholders likely took comfort in Pincus' declaration that all new games will have mobile elements but it may be too little, too late. Glu Mobile is probably the most promising of the three but only for a speculation.


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