Saturday, July 28, 2012

ANALYSIS: Social Media Stocks Bleed on Uncertain Future (NASDAQ: FB, ZNGA, GRPN, YELP, P)

Stocks of social media companies led by Facebook Inc(NASDAQ:FB), Zynga Inc(NASDAQ:ZNGA) and Groupon Inc(NASDAQ:GRPN) have been taking a battering on Wall Street recently as uncertainty over their revenues and increased spending have spooked investors into dumping their stocks.

It is a reprisal of the dotcom boom and burst witnessed in 1999/2000 when internet stocks flattered only to deceive, so to say.

Analysts said that part of the disenchantment with these companies was due to the exalted valuations that their stocks commanded during their stock market debuts and optimistic earnings projects that were belied once their results were announced.

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Now that the initial euphoria has worn off, investors in user-driven social media sites are starting to question their revenue model and their long-term sustainability. The concern uppermost in everybody's minds is whether consumer-fatigue will finally catch up with mostly seen as a fad.

The biggest example of this was that gorilla of social media, Facebook which has seen its shares erode by a third since its hyped-up debut in May this year at an IPO price of $38 a share. Its results for the June quarter showed that the company is facing challenges in holding on to revenues as consumer preferences shift to mobile devices where advertisers are still scanty.

Facebook's woes were also due partly to its gaming partner Zynga, whose flagship Farmville game played on the social networking site, showed a dip in subscriber base. Zynga, which has seen its share prices eroding by nearly 70 percent has been struggling to retain visibility on Facebook while new games have yet to gain traction.

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Daily discounted deals site Groupon, which burst on to the scene holding out the promise of revolutionising e-commerce, has seen its shares slide in nine months to as law $6.50 from its IPO price of $20 a share.

Things are no better for music service provider Pandora Media Inc(NYSE:P) whose shares have dropped to around $10 a share from its June IPO price of $16.

The recent quarterly results of most of these companies have come as a reality-check for analysts and investors, as they cut forecasts and guided for lower earnings in the future.

Facebook did not give a forecast but Zynga slashed its earnings forecast for the year to 4 to 9 cents a share from 23 to 29 cents a share. The stocks of both companies have tested all-time lows this week.

However while it looks like a bloody battlefield out there now, there are pockets of optimism in the sector. LinkedIn Corp, which has a stronger business focus compared to many of its peers is trading at about $100, above its IPO price of $45 a share in May last year.

Local reviews firm Yelp Inc(NYSE:YELP), which went public in March this year, is still holding above its IPO price of $15 a share, though its shares have also seen a decline along with Facebook.

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"A lot of these companies are going to make a quick buck and flame out," Reuters quoted Peter Schiff, chief executive of Euro Pacific Capital as saying. "Just look at 10 years ago." 

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