Analyzing 3 Web 2.0 Companies

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

2012 wasn’t a great year for the Web 2.0 companies. Although market sentiments were positive in the beginning of the last year, things took a U-turn after Facebook’s IPO. Web 2.0 companies saw a significant decline in their stock prices as well as investor perception of their business models. However, towards the end of the year there were some green shoots for Facebook as its mobile strategy started getting good results. Groupon also gained a high profile investor Chase Coleman. I think Facebook can give good returns in 2013 while Groupon’s declining fundamentals still create a doubt in my mind as a long term investor. I am also skeptical about Zynga’s prospects in 2013 and would recommend avoiding it. Here’s a look at these stocks in detail.

Facebook (NASDAQ: FB): Facebook is coming back into shape and the way it is heading to in 2013 I can see it making major progress. The company is focusing more on mobile advertising and it wants to further monetize its mobile advertising business. The company is doing well in this regard as in October 14% of its total ad revenue came from mobile and 20% of its ad spending was also made on mobile. Though the mobile monetization is in the initial phase, Facebook has recently seen success in monetizing mobile traffic through its Newsfeed ads. Currently Facebook is the most downloaded application on mobile thus creating a significant opportunity for the company. As per the Deutche Bank analyst Ross Sandler Facebook ad growth will be better than 40% in 2013. Moreover, its recently launched Facebook Exchange (FBX) is anticipated to provide an incremental lift to the advertising rates. It allows the advertisers to retarget the specific users through the use of cookies that track the users browsing history. Within less than six months of its launch FBX ads already comprise about 25% of Facebook’s right-rail advertising block. With the growing success of FBX it is expected that Facebook will integrate FBX with its newsfeed products on web as well as on mobile. The company has a great momentum and is expected to post $1.52 billion in fourth quarter revenue, a 34% y/y growth compared to just 23% to 3Q12.

Groupon (NASDAQ: GRPN): Groupon is going through some major challenges and has lost investors’ confidence after it reported disappointing 3Q12. To make up for a challeging core business, the company is diversifying itself into other businesses and further making acquisitions which will add value to its business. Groupon has announced that it will be helping smaller business in making an online presence and providing them services like online booking sites and scheduling tools. In December, Groupon announced that it will be acquiring the online service CommerceInterface based in Salt Lake City. Though the amount has not been disclosed, CommerceInterface will help Groupon in managing Groupon Goods, an e-commerce business that sells products sourced from thousands of vendors. This acquisition was made in order to expand its business and to differentiate itself from many other online deals websites. Groupon is focusing on establishing its position as an e-commerce company. Earlier this month, Groupon announced that it has purchased Glassmap, makers of a real time location based social sharing application for smartphones. This service now will be combined with Groupon Now which aims at delivering deals on local business which is based on geo-location data. Glassmap lets its users to share their location with their friends in real time layering in social data from social media platforms. Further, it will enable Groupon to know where the user is and Groupon by using this information will offer specific deals to the user which may be relevant and attractive to the consumer. The above factors give me a bit of an optimistic view but still I will maintain a hold rating for the company as the concerns in its core deals business keeps me worried.

Zynga (NASDAQ: ZNGA): Last November, Zynga made amendments in its agreement with Facebook which was originally made in 2010 for five years. As per the new agreement Zynga can now be more flexible in offering its games on other platforms as well as on its own website Zynga.com. Earlier the company was bound to make its games available exclusively on Facebook. Now Zynga will no longer be required to use Facebook's payment system or display Facebook's ads on games published on other platforms. Further, the company does not have to pay the 30% revenue share for the games played on Zynga.com and some investors anticipate that it will help Zynga to grow into a more profitable games publishing platform. But I don't agree that this change in relationship is fruitful to Zynga as the shares of the company tumbled 13% as soon as this amendment was disclosed. Zynga lost its special relationship with a leading social network and will not be able to receive a valuable treatment as it used to get under this partnership, moreover Facebook accounts for 80% of Zynga's revenue. In December, Zynga closed its 11 titles out of 13 which were not performing as per the expectations including PetVille which had 1 million monthly active users disappointing its huge user base. Shares of Zynga have plunged 75% in 2012 and further this new partnership is a sign of decline for the company.

To conclude, I highly favor Facebook for long term investment as the company has many innovative plans in its bag that will take it a long way. Groupon has to still show its strong fundamentals which will put it back in the game. Zynga on the other hand seems to be a big loser with hard times ahead.


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