Why Social Media Companies Are Underperforming

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

Story of the year? Facebook (NASDAQ: FB). There was such unprecedented media discussion about Facebook's IPO (Initial Public Offering) some investors were becoming annoyed. We all know the result - Facebook's stock plummeted over the course of the year, and most social media companies followed. Obviously, E-commerce companies offer different services than social media companies, but the biggest difference is accounted for elsewhere.

Social Media...

Facebook's IPO was distorted on so many levels it shook some investors’ confidence. Facebook was arguably the largest IPO ever, and the results were disastrous. Facebook showed a 35% increase in revenues, and a 219% increase in total cash. Sales, general and administrative expenses increased 232% and their stock fell approximately 28%. Because of Facebook's collapse, investors have started viewing social media companies skeptically - and for good reason. 

Zynga (NASDAQ: ZNGA) owns rights to several games including FarmVille and Texas HoldEm Poker. In 2011, FarmVille accounted for over 11% of Zynga's revenue. Today, FarmVille only represents 1% of Zynga's revenue. Past users aren't using FarmVille as frequently, but Facebook acquired over 200 million new users in 2012. Texas HoldEm Poker accounts for an impressive 43% of Zynga's revenue, but still the stock lost 67% in 2012. Facebook and Zynga performed poorly this year, however E-commerce companies surged.

Though millions of people use Facebook and Zynga, both companies lack a very important aspect of business. People are attracted to convenience, variety, and value. Facebook and Zynga are Goliaths in their industry, offering convenience to their customers and another option for social media. However, these businesses show no more value than the rest. 

E-commerce...

Amazon (NASDAQ: AMZN) provides a durable competitive advantage because they provide all three attractions. Facebook, Zynga, and Amazon can be used anywhere, but only Amazon provides the most bang for your buck, with more variety than competing businesses. While Facebook and Zynga lack only one of these factors, it happens to be the most important.

Amazon's shareholders are ecstatic as it consistently provides outstanding results. The company's revenues have increased by 31% in 2012, and the stock has reacted similarly. Though Amazon may not provide cheaper products than competitors every time, Amazon remains focused on convenience, variety, and value. 

Like Amazon, eBay (NASDAQ: EBAY) also accounts for all three aspects of business. This past year eBay's stock even out performed Amazon's. While eBay gains revenue from PayPal, advertisements, and the marketplace the management still focuses on convenience, variety, and value. eBay saw revenues increase 17% this past quarter, but gave their shareholders a far greater return. eBay, like Amazon, understand and accept the need to provide value.

Below is a graph comparing all four of these companies, along with the S&P 500. 

<img src="http://media.ycharts.com/charts/5a68053ed9322fc887e683425c862f01.png" />

FB data by YCharts

The Bottom Line...

Facebook may be the story of the year, but don't expect great performance. Amazon and eBay have done a phenomenal job at providing a variety of discounted products from the convenience of your own home. This gives them a durable competitive advantage over other companies lacking in value. Though I don't expect Zynga and Facebook to continue their dramatic spiral, I don't see them finding a competitive advantage that will separate them from competitors. E-commerce companies like Amazon and eBay have found something Zynga and Facebook don't have - the missing link


tlwofford has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. 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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