Zynga and Groupon: Have the Bottoms Set In?

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Zynga (NASDAQ: ZNGA) and Groupon (NASDAQ: GRPN) both had initial public offerings within the past two years. Groupon debuted in November of 2011 by offering shares at a price of $20. Zynga debuted in December of 2011 at $10 a share. The share prices of both companies cratered over the next 12 months. Within the last six months, both stocks have shown some life and have recovered to some extent. The question is whether a firm bottom has set in, and if there is opportunity for investors to pick up shares in the companies at affordable valuations.

Groupon proceeded to drop from its IPO price of $20 to a low of $2.60 in November of 2012, a decrease of about 87%. The price has since rebounded over the past 6 months. It is currently trading around $6.88, and is up over 68% in the past six months.  Check out the price chart here.

The Company's numerous missteps through its IPO process and beyond have been well documented in the media. However, Groupon has gone through some major changes as of late, with the replacement of founder CEO Andrew Mason in late February. Groupon has major challenges facing it. For the first quarter of 2013, Groupon reported gross billings, which represents the dollar value of customer purchases of goods and services, rose 4% to $1.41 billion, compared with $1.35 billion in the same prior year quarter. While revenue increased 8% to $601.4 million, the Company reported a net loss of $.01 per share, or $4.0 million. The earnings were hampered by the poor performance of the international sector of the business.

Many observers believe that Groupon's business model is flawed. One factor is the lack of barriers to entry for competitors. Once Groupon took off, a number of other companies entered the business, including Living Social and Amazon (AMZN). There is nothing preventing these competitors from overtaking Groupon's customers. Living Social is also having issues obtaining profitability, which may be another indication that the daily e-mail deal model is not sustainable. Amazon made an investment of around $175 million in Living Social, but reported a loss of $169 million related to Living Social in the third quarter of 2012.

The daily deal e-mail model is proving to not be profitable enough. Groupon has undertaken a more generic strategy of offering goods for purchase on its site. Further, now that the initial hype has worn off, merchants are not finding that the coupon deals do not necessarily lead to long-term customers. As such, merchants are less likely to offer the deals again. The future for Groupon appears to be hazy at this point. The stock is highly shorted by the market, with the most recent short interest reported at over 27 million shares. Although the share price has rebounded slightly, Groupon has not proven that it will be able to operate profitably in the long term.

Zynga encountered a similar dramatic drop in share price, hitting a low of around $2.08 in November of 2012, a drop of over 79% from its IPO price. Shares have rebounded a bit, having hit $4 in mid-March. The price is trading around $2.85 recently.

Zynga recently announced that it laid off 18% of its workforce and closed numerous offices. The share price dropped over 12% in one trading day after the announcement. A portion of the Zynga stock price rise in the last 6 months was likely attributable to the hype surrounding real money gaming offered in the UK. New Jersey and Nevada recently legalized real money on-line poker, and may be followed by other states. Many believed that Zynga would be well-positioned to take advantage of the real money market in the United Stated, due to its popular slot and poker mobile games. While Zynga has applied for a license to offer on-line gambling in Nevada, it is still facing a number of regulatory hurdles. Thus, real-money gaming may not be a reality for Zynga in the near-term future. The combination of the stock chart showing weakness, with the recent negative news, is indicative of the continued issues which plague the Company now. Investors may do well to wait until the ship has righted itself at Zynga.

Both Zynga and Groupon are facing some serious hurdles to reach their IPO debut prices. It is at least possible that both of them could be acquisition targets due to their loss in share value. Groupon has a market cap of $4.5 billion, while Zynga has a market cap of $3.23 billion. Any acquisition, or news of an acquisition, could send the share prices of both companies up. Yet, it is unclear who would acquire either entity at this point. As such, the future remains clouded for both companies.

Zynga's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this newly public company. Being so closely tied to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about Zynga and whether it's a buy or a sell in our new premium research report. Don't even think about picking up shares before you read what our top analysts have to say about Zynga. Click here to access your copy.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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