It’s been a Jekyll and Hyde year for online stocks. While the underlying Nasdaq Composite Index has been buoyed lately by impressive numbers from heavy hitters like Google (GOOG, GOOGL) and Amazon (AMZN), many of the smaller names have struggled to keep pace with rising expectations and shareholder impatience.
So far the Nasdaq index has greatly outpaced traditional blue-chip stocks, moving up 8.3% on a year-to-date basis, while the benchmark S&P 500 Index is up only 2.2% over the same period. The Nasdaq, however, is down nearly 2% off its all-time closing high for the year, reflecting the free fall in market value that some online stocks have suffered in recent months.
As we enter into the fray of earnings season, many such companies will be eager — or desperate — to stage a comeback rally. Here are three online stocks that have found themselves out of favor in the markets this year. Which ones will make the grade?
Troubled Online Stock: Zynga Inc.
Of the many troubled online stocks, Zynga Inc. (ZNGA) shares have been notoriously choppy and unpredictable over the past seven months. Between ZNGA stock’s high and low for the year, there is a 31% difference in magnitude. Much of the price action has gyrated multiple times between these two extremes.
In fact, between January and August, there have been 17 instances on a day-over-day basis where ZNGA stock moved 3% or greater, accounting for around 12% of all trading days this year.
With Zynga’s second quarter of fiscal year 2015 earnings release date scheduled for Aug. 6, there’s much concern about ZNGA stock’s future prospects. Although there has been only one miss over the past 13 earnings reports, much of this is a result of narrowing expected losses in net income. At some point, investors will want to see ZNGA stock actually become profitable.
Unfortunately, top-line sales suggest that Zynga will force more patience out of current shareholders. The $690 million generated for FY2014 was on average 36% below that of FY2013 and FY2012. Additionally, the company has been losing money for several years — a trend that has not been stopped despite a massive layoff in June of 2013.
Investors are hoping that the recent layoff announced on May 6 of this year will help stem the tide for ZNGA stock. However, the markets have been unimpressed with Zynga’s business tactics and it’s unlikely that this sentiment will change anytime soon.
Troubled Online Stock: Groupon Inc.
Few investors are feeling as much heat this year as shareholders in Groupon (GRPN). Among the online stocks covered in this article, GRPN stock has been the most devastated, losing nearly 42% of value in the markets since the beginning of January. The bears have been relentless, and GRPN stock has essentially only seen one direction — down.
Can a positive earnings results for Q2 FY2015 — scheduled for release on Aug. 6 — turn things around?
In actuality, the troubles afflicting GRPN stock belie its earnings per share performance history. Just like ZNGA stock, Groupon’s earnings have only missed Wall Street consensus one time over the past 13 reports. But GRPN stock also faces the same challenge affecting many online stocks — costs rising faster than revenue.
While Groupon’s annual revenue for FY2014 rose 24% above FY2013, its cost of revenue jumped ahead by 53% over the same time frame. This situation will need to be controlled if GRPN stockholders are to be happy.
Despite the extreme bearishness in the markets, many Wall Street analysts, including renowned Deutsche Bank, are keeping the faith with GRPN stock. However, this optimism may not be as crazy as it appears.
Charting GRPN stock’s price over the past 13 earnings releases reveals that the markets are finding a more realistic valuation for Groupon after its lofty initial public offering price. Thus, Deutsche Bank’s target of $8.50 per each GRPN stock has some math behind it — roughly speaking, the forecast coincides with Groupon shares current lifetime price average.
Buying GRPN stock now would still be a very speculative affair given the massive selloffs witnessed in the markets. Nevertheless, there is some technical evidence to suggest that risk-takers may be well rewarded.
Troubled Online Stock: RetailMeNot Inc.
Digital coupon provider RetailMeNot Inc. (SALE) is one of few online stocks that is in the black for 2015, up nearly 4% YTD. However, merely focusing on that statistic alone would conveniently ignore the backlash SALE stock has endured in recent months, which is down 30% since late May.
Fundamentally, there’s little reason to believe that SALE stock would continue to be in the gutter for too long. The strength in RetailMeNot’s balance sheet — highlighted by its cash-rich and debt-poor status — is readily apparent. Combined with rapid gains in annual revenue, these factors make SALE a formidable package.
The proof is in the earnings. Since SALE stock’s IPO on July 19, 2013, the company has released eight earnings reports, all of them exceeding Wall Street consensus with an average surprise of 21.48%. This type of consistent outperformance is fairly rare in the markets, especially as the bull market in U.S. indices is starting to show signs of wear.
When the financial results for Q2 FY2015 are released on Aug. 5, expect more of the same. RetailMeNot has very low operating expenses and costs of revenue, giving the company a big advantage over other online stocks. The primary criticism is that, relative to earnings, SALE stock is theoretically considered expensive. However, this is more a factor of SALE stock’s growth potential — many online stocks in the marketing services sector are technically flashing negative price-to-earnings ratios.
It’s not the easiest thing to buy when so many others are selling, but SALE stock has solid fundamentals that make current market prices an attractive opportunity.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
