3 Web 2.0 Companies That Are Buys: Zynga Inc (ZNGA) and More

Web 2.0 companies have had a good run in the last three months. While these stocks are still trading below their IPO price, this renewed investor interest makes them interesting long candidates. The following table summarizes price appreciation for these stocks over the last three months

Company Name Year to Date Appreciation 3 Month Gains
Facebook (NASDAQ:FB) 2.81% 36.36%
Groupon (NASDAQ:GRPN) 8.84% 96.65%
Zynga Inc (NASDAQ:ZNGA) 37.28% 54.28%

Facebook Inc (NASDAQ:FB)

Facebook recently reported strong 4Q12 results driven by user growth, new product offerings, and new ad formats. Mobile, in particular, presents a good opportunity for Facebook. Mobile usage constitutes ~50% of DAUs (Daily Active Usage) for Facebook, while just 23% of its revenues. As Facebook tries to bridge this gap with its mobile app and Facebook exchange platform, there is a good chance that mobile revenues will increase substantially from their current levels. Facebook, with its position as world’s leading social networking website, also remains on a sweet spot as advertisers continues to realize increasing importance of “social” context in online advertising. Apart from the company specific factors, the broader macro trends in online advertising remains positive, as is evident from better than expected results from both Facebook and Google Inc (NASDAQ:GOOG). I believe that Facebook’s stock will continue its uptrend and recommend buying it.

GrouponGroupon Inc (NASDAQ:GRPN)

Groupon is a play on increasing migration of local commerce to online channels – a trend which will likely continue for the next several years. The company turned profitable last year and is expected to grow its EPS by 41% in 2013. I believe the company can see several positives in 2013, like bottoming of the local deal business in North America and improvement in European end markets. The company will also benefit from increasing mobile and app usages. In addition, Groupon goods also provides another growth driver for the company. Groupon is currently trading at a valuation that is ~50% lower than what Google offered before it went public. I won’t be surprised if Groupon receives a buyout offer in the near future. Another thing which makes me bullish on the company is Tiger Global Management’s huge bet on the company given they hold 65 million shares of Groupon.

Zynga Inc (NASDAQ:ZNGA)

Zynga recently reported strong 4Q results that were ahead of consensus both from the topline and bottomline perspective. Zynga is making its strategy more focused by reducing the number of games in development and concentrating on fewer games with better financial prospects. This strategy will likely help the company’s return on investments in the future. Zynga also remains on track to launch real-money poker and casino games in UK in first half of this year which will be a positive for the company. Recent news regarding possible legalization of online gambling in some of the US states is also a positive for Zynga. The company has $2 per share worth of cash and real estate assets on its books that are likely to provide a strong downside support to the stock. On the other hand, any positives from online gambling, Zynga.com platform, strong mobile growth, and new games can lead to substantial upside in the stock price. Thus, risk reward profile for the stock is skewed towards the positive side.

Foolish Conclusion

To sum it up, increasing mobile revenues and growing importance of “social” context in online advertising makes me bullish on Facebook. Groupon is a good investment given increasing migration of local commerce to online channels. Zynga’s strong asset base provides a good downside support while there are several catalysts on the upside like online gambling, Zynga.com platform, new games launch etc. which makes me bullish on the company.

The article 3 Web 2.0 Companies That Are Buys originally appeared on Fool.com and is written by Ash Sharma.

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