Commentary

Social Media Stocks Get Hammered

With the notable exception of LinkedIn, the first social media companies to go public have suffered a fairly disastrous debut, with investors apparently souring on Groupon, Zynga, and Facebook. The falling fortunes of all three social media stocks reflect widening skepticism about the viability of their business models -- extending, in at least some cases, to the efficacy of social media advertising.

Today’s big loser was Groupon, whose earnings results revealed disappointing sequential revenue growth in the second quarter -- up just 2% from the first quarter. At the time of writing, Groupon was trading at $5.53, down 27% from $7.56 when the market opened, and a whopping 72% from its IPO price of $20 back in November.

Although Groupon founder and CEO Andrew Mason pointed to economic woes in Europe as a contributing factor for slowing revenue growth, investors were probably more troubled by the 5% decline in billings across the board, suggesting that consumers or vendors (or both) may be experiencing “deal fatigue.” That wouldn’t be surprising, when you consider growing criticism of Groupon’s revenue-sharing structure by vendors, who may feel the paltry returns just aren’t worth it. By the same token, barriers to entry by other group-discount players remain low, meaning Groupon remains under constant threat.

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Then there’s casual gaming giant Zynga, which was trading at $2.99 at the time of writing. That’s up 2% from $2.93 when the market opened -- but down 70% from its IPO price of $10. Much of the decline came following Zynga’s disappointing second-quarter earnings announcement on July 25 (leading the company to grant additional stock to employees who saw the value of their stakes tumble, in order to prevent a general exodus, according to Bloomberg). The earnings announcement was followed last week by the resignation of chief operating officer Andrew Schappert, who left on August 9 after a management shakeup reduced his responsibilities.

Zynga faces a number of threats and obstacles to further growth. Founder and CEO Mark Pincus said that changes implemented by Facebook, including policies intended to reduce SPAM-like messages, were making it harder to recruit new users for Zynga’s games. Like Groupon, Zynga is also operating in a marketplace with low barriers to entry, leaving it vulnerable to new competition, and faces the additional challenge of keeping gamers interested -- a real, chronic issue, as the steep decline in one-time favorites like Farmville suggests that casual games don’t foster long-term attachments like other video games. What’s more, many investors question Zynga’s acquisition of OMGPop, producer of Draw Something, which also saw a steep falloff in users. Finally, one big potential growth area for Zynga, mobile gaming, is more difficult to monetize through advertising or virtual goods sales.

Facebook, by far the biggest social media company to go public, was trading at $20.80 at the time of writing, down 3.7% from $21.41 when the market opened, and 45% from its IPO price of $38. Investors appear to be skeptical about Facebook’s ability to monetize mobile traffic, since, as noted above, it’s harder to deliver advertising to smaller mobile screens without disrupting the experience and annoying users. Doubts also persist about Facebook’s established, online advertising business, amplified by GM’s unceremonious dumping of Facebook just before the IPO, and more recent allegations that a large proportion of clicks on Facebook ads come from bots. 271 million more shares are becoming trade-able after a “lock-up” period ends on Thursday, but in the current environment, the new shares are likely to just put more downward pressure on the price.

The only winner in the group is LinkedIn, which was trading at $103.35 at the time of writing, more than double its original IPO price of $45. Although its net income declined in the latest quarter, this was due to capital investments to expand the company, and investors took a sanguine view. It’s worth noting that very little of LinkedIn’s revenue comes from advertising; instead it makes most of its money from premium memberships and services like corporate recruiting and headhunting.

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