Facebook Unfriends Zynga, Groupon and other Social Stocks

by Jeff Reeves | May 18, 2012 1:06 pm

While Facebook [1](NASDAQ:FB[2]) was taking off via a strong IPO Friday afternoon, opening up as much as 12% in early trading, its social media cohort Zynga (NADSAQ:ZNGA[3]) was crashing and burning.

After a decline of as much as 13%, shares were briefly halted from trading midday Friday – putting the price down about 25% on the year and 50% lower from a peak of almost $16 in early March.

And Zynga is just one of the the social media stocks taking a dive today as Facebook steals the spotlight. Pandora (NYSE:P[4]), Groupon (NASDAQ:GRPN[5]) and others are seeing shares decline sharply.

The big reason for the sector-wide struggle? Well, there isn’t really any news out there — other than the typical macroeconomic headlines about trouble in Europe and persistently high unemployment that we’ve all come to know and love.

So the simplest explanation is a “Facebook effect,” where traders who were looking for a one-off on Facebook have been freeing up capital to plow their money into actual FB stock now that they have the chance. Heck, there are even those on Wall Street who think the reason Apple (NASDAQ:AAPL[6]) has seen headwinds is because of investors freeing cash for FB shares.

There’s also the fact that Facebook isn’t going to the moon like some thought. After being priced at the high end of its range at $38, the stock has tacked on a nice double-digit premium, but it certainly isn’t delivering an instant doubler like some FB fanboys had hoped.

In short, all eyes are on Facebook — and secondary social media stocks are left out in the cold.

But that’s only part of the story. The other part, of course, is the very real struggle for companies like Zynga, Groupon, Pandora and others in the current environment. These stocks have no concrete growth plans, difficulty turning profits from mobile devices and even some trouble doing math. Groupon restated earnings in April[7] and Zynga restated sales last year[8].

I don’t want to get lost in the weeds too much of every social stock, but look at some recent headwinds for Zynga to illustrate this point:

• Last week Cowen & Co. analyst Doug Creutz[9] wrote in a research note that Zynga’s daily active user base fell by 12.5% in April. He was bearish on the stock, pointing to increased competition in the gaming world.
• The $180 million purchase of Draw Something developer OMGPop in March[10] was meant to bridge the gap from desktop to mobile gaming and fend off ZNGA rivals. However, some have hinted that Zynga paid too much for the firm in a knee-jerk bid. Several analysts have also noted that the daily users of Draw Something had fallen since April, fueling such talk.
• Without backing out compensation costs, the Zynga earnings in April[11] included a net loss of $85 million and hinted at trouble plotting future growth.

Get the picture?

It’s a perfect storm for companies like Zynga today. Investors are scared of the stock market in general, Facebook is sucking all the oxygen from the room and bad headlines that have weighed on the stock are only fueling today’s sell-off.

So what will happen from here? Well, the financial media will eventually slow down the hype machine over Facebook and investors will get back to business as usual.

Unfortunately, for Zynga and some of these other struggling social media stocks, business right now just isn’t very good.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[12] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/05/facebook-unfriends-zynga-groupon-and-other-social-stocks/

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