Why Zynga Is a Better Bet than Facebook
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A lot of Web2.0 stocks have taken a beating after the poor performance of Facebook's (NASDAQ: FB) IPO. Zynga (NASDAQ: ZNGA), in particular has seen quite significant correction and is down over 32% since Facebook’s IPO. Its stock price has also shown a good correlation with Facebook’s stock price (see chart below).
Source: Google Finance
Both Facebook and Zynga have gained some of the lost ground in the last couple of days. While Facebook is up 9.5% since last Wednesday, Zynga is up 11.7%. I analyzed both of the stocks to figure out which one offers a better risk reward if the recent uptick turns into a full-fledged uptrend. Zynga appears to be much better investment than Facebook. Here are some of the key reasons for my choice.
- Zynga is way cheaper than Facebook: Zynga is currently trading at just 15.44x forward PE. Facebook on the other hand is trading at 45.48x forward PE. This despite the fact that Facebook’s EPS growth from the current year to the next is expected to be just 22%, according to consensus estimates, versus 33% of Zynga.
- Increasing mobile usage is a positive for Zynga while negative for Facebook: One of the big concerns Facebook investors have is increasing usage of mobile phones. Facebook derives a majority of its revenues from advertising. Advertisements on mobiles are less effective due to small screen sizes and thus increasing mobile usage is a big headwind for Facebook. On the other hand, Zynga derives less than 10% of its revenues from advertisements. Increased usage from mobile would in fact be a positive for Zynga as its gaming revenues from subscriptions and sales of virtual goods would more than offset any loss from advertising. Further mobile platforms like Android and iOS provide an opportunity for Zynga to derisk its model by reducing overdependence on the Facebook platform.
- Corporate governance issues: Corporate governance is an issue with Facebook. Mark Zuckerberg owns the majority of voting rights in Facebook. Although this is not very uncommon these days, I am a bit concerned about it given the recent “selective disclosure” scandal during Facebook’s IPO. The company’s management selectively disclosed sensitive information to some of the favored analysts during the IPO road show, keeping the ordinary retail investors in dark. Although I am not a legal expert, I believe such selective disclosures are against the law. I remember at least one of the cases during recent times in which a public company’s officials were fined for selectively disclosing the information to the favored analysts. The case was related to Office Depot and its details can be found here. If Mark Zuckerberg wants to hold disproportionate voting rights, the least he can do is act in the interest of all the shareholders and not only the big ones.
Zynga’s P/E multiple is likely to expand as it derisks its business model by tapping the opportunities available with mobile platforms like iOS and Android. Increasing mobile usage will also lead to more visitors and subscribers for Zynga, which will mean more revenues/EPS opportunity for the company. With better corporate governance and low valuation multiples, Zynga is my preferred Web 2.0 pick as compared to Facebook.
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