Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA), in my view, face very different future growth stories. While I believe one can rebuild its business to be sustainable–and is already doing so–I see the other one as stuck in a perpetual time warp. Social media moves fast, so either one is vulnerable to getting caught behind the competition. However, investments by one of these companies have helped reduce that risk…
Despite my typical aversion to social media stocks, I have quick to be bullish on Groupon Inc (NASDAQ:GRPN)–a sentiment that was supported by the stock nearly doubling from the low (the point at which I recommended it). There are several reasons why I am bullish on the company. First, I like the acquisitions that it has made. From CommerceInterface to Glassmap, the company is making a legitimate attempt at the eCommerce space that combines the social networking aspects of real-time deals in real-time travel. Second, partnerships with major media groups, like the MLB, represent a step forward in terms of sustainability. With a leading position in mobile deals, Groupon Inc (NASDAQ:GRPN) has established itself as the go-to source for mobile deal support. This is likely to change irrespective of deals from small local businesses at this point.
The third reason I like Groupon Inc (NASDAQ:GRPN) is mostly secular. With consumers now more price conscious, they are looking for deals; and this is becoming increasingly true with smartphone penetration recently eclipsing 50% in the United States and catching up European exposure. Perhaps this is why Sterne Agree recently expressed that it has “greater conviction in the company’s ability to evolve beyond its current business”.
And, if nothing else, the current business isn’t exactly bad. The stock only trades reasonably at 24.8x forward earnings for an expected growth rate of 27.1% over the next 5 years. Meanwhile, free cash flow is generously at a yield of 7.5% and unburdened by the absence of long-term debt.
I am considerably more concerned about Zynga Inc (NASDAQ:ZNGA), the social video game developer. It is making a foray–in my view, an increasingly desperate one–in online gambling business in the UK this quarter. They’re also readying paperwork to launch a gambling business in Nevada and 3 free gambling games on Facebook have already been launched Elite Slots, Zynga Slots, and Zynga Poker. While I have expressed optimism about the gambling initiative in the past, my intent is on providing both sides of the story–unfortunately, I am closer to the bear’s take for now.