This articles was submitted by Louis Basenese of
The Facebook IPO is coming! The Facebook IPO is coming! The
Facebook IPO is coming!
After relentless speculation and anticipation, the most popular
social network site finally filed for its initial public offering
Sadly, we'll have to endure another couple months of "friending
fever" before shares actually begin trading. (The anticipated IPO
date is sometime in May.)
While we wait, no doubt investor interest in other social media
stocks is going to heat up. But please don't let the hype
push my warnings of a few weeks ago
into the dark, deep, unreachable recesses of your mind. (
's Justin Fritz has
some choice words
on the subject, as well.)
Almost without exception, social media IPOs have proven to be a
sucker's bet. To date, none of the hype has translated into any
profits for everyday investors. And I don't expect that track
record to improve any time soon.
Zynga: Still a Skeptic
Aside from Facebook's IPO filing, the next biggest news in the
social media space of late is that social-gaming company,
(Nasdaq: ZNGA), is considering expanding into online gambling.
Some will argue the move is logical. After all, Zynga already
runs the country's most popular online poker game, Zynga Poker. So
it would just be tapping into its user base to offer another
product of interest.
Anybody home? Huh? Think, McFly. Think!
Remember, Zynga was only founded in 2007. By all standards, it's
still an infant. And yet management is already looking for new
Forget being overly reliant on Facebook. Forget operating in a
hit-driven industry. Forget about deriving the overwhelming
majority of its revenue (96%) from a microscopic minority of its
users (3%). Changing focus so early on is the biggest red flag of
all for Zynga's stock!
I mean, think about it. Currently Zynga operates a business with
first-mover advantages and limited competition. A move into online
gambling, however, would carry none of those benefits.
Not to mention, it introduces and exposes the company to a world
they know very little about. Namely, regulation.
In the end, Zynga's management is sending a message to investors
that growth for its core business is already waning.
After only seven years.
And it's waning so much that they're on the hunt for new growth
opportunities in industries completely outside their core
Given all that, I stand by my conviction to avoid Zynga's stock.
Even in the face of "Buy" recommendations from Wall Street titans,
) and Barclays Capital. (They were all underwriters for the Zynga
IPO, by the way, so they're probably not the most unbiased parties.
Groupon is Guilty, Too!
Sadly, Zynga's actions aren't isolated. They're symptomatic of a
much larger problem in the social media industry.
Consider daily deals juggernaut,
(Nasdaq: GRPN), for instance.
Well before it went public, we panned the stock. And for good
reason. It, too, is guilty of expanding outside its core
competencies too soon in its life cycle.
The company went from offering a single product - daily deals
for consumers in their local markets - to expanding into an
ever-increasing list of products. Groupon now offers travel deals,
event tickets and retail products.
Keep in mind, this is the company that literally created the
online deals market in 2008. Now, just four years later, it's
looking for growth in highly competitive markets dominated by the
(Nasdaq: AMZN) and
That's a problem. Clearly, its early growth and original
business model isn't sustainable. And the latest results bear it
out. Margins are shrinking, down from 44% of billings in the first
quarter to 37% in the third quarter of 2011.
Bottom line: The fundamentals that shot social media companies
to instant stardom are already fading. That doesn't bode well for
future share prices. And when the history books are written, I'm
convinced the only ones who will have profited from all the hype
are going to be the investment bankers, not everyday investors like
you and me.
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