As can be seen in the stock charts of recent Internet IPOs, much of the early hype has been lost. However, two, Groupon Inc (NASDAQ:GRPN) and Facebook Inc (NASDAQ:FB), have managed to recover much of the lost value through showing signs of a “second life.” What does the future of Groupon hold? And how does it compare to Zynga Inc (NASDAQ:ZNGA)? This and more below.
After a failed IPO, Groupon has tried to diversify away from the core business. Groupon is now eying the acquisition of CommerceInterface, which will strengthen its e-commerce position. Groupon already used CommerceInterface’s services for its online sales, so this form of vertical integration is seen as a way of expanding margins. As a channel management software developer, CommerceInterface represents a key piece to the puzzle in getting Groupon to think “outside the box” and adopt a sustainable business model.
Their “special deal” sister website, Groupon Goods, is expected by Evercore to gross $2.5 billion in FY 2013–150% more than the same period last year (2012). The service currently has over 40 million users. Groupon’s management announced that they became the official partner of the MLB in daily deal tickets and box seats partner. It is this kind of long-term focus that I believe will greatly benefit the firm in terms of its relevance in major media outlets.
The company’s strategy of diversifying already appears to be paying dividends with the stock up more than double from the lows. At a free cash flow yield of 8.5% and no debt, Groupon is well positioned to continue its rise. EPS is forecasted to grow at a rate of 27.1% over of the next five years–more than enough to make the stock undervalued by over 25%. While the stock is risky due to its weakening core business, I believe the diversification strategy makes sense amidst all the proliferation of smartphones and tablets. Since this is a very speculative stock, I recommend buying now rather than later. That is to say: Do not miss the opportunity, as shares are priced fairly low given the expected growth.
Is Zynga Dead in the Water
Zynga, the social game developer, is ready to launch new online gambling games in the UK in 1Q 2013. They are trying to get paperwork done for a gambling business in Nevada, and they released three free games on Facebook: Elite Slots, Zynga Slots and Zynga Poker to potentially build up pent-up demand. They even entered a deal with Synacor that will place Zynga’s games on the homepages of past pay-TV users.
Some are acting like Zynga has been left to rot by Facebook Inc (NASDAQ:FB). Here’s the issue the market is worried about: Facebook Inc (NASDAQ:FB) essentially tore up its contract with Zynga to allow for new social networking game developers. Further, the proposal of a sliding scale royalty fee, wherein smaller game developers would get a greater share of the profit, throws a wrench into the relationship. Shares have plummeted 85% from the 52-week low and never really recovered since.
In my view, Zynga’s long-run prospects are weak. The fact of the matter is that the company is showcasing the early signs of death. Revenue is plateauing, and the company has scaled back by completely retiring some of its games. Either your core business is so eroded that you need to make cost cuts early in the game or your own games, well, stink. Either way, the company is not in the best of positions.
Between Groupon, Facebook, and Zynga, I believe Zynga has the worst likelihood of diversifying into a sustainable profit stream. Facebook Inc (NASDAQ:FB) can achieve sustainability by virtue of leveraging its 1 billion+ user base into different platforms, like e-commerce, pay-per-action, app development, you name it. What can Zynga do? It is now trying to move into online poker, but that area has plenty of existing competition.
Conclusion
The video game industry is large, but investors understand the competition issue. Most of the social network games are free-to-play, and they get an above-average amount of users. The chances of Zynga tapping into a sustainable market that requires users paying money in the long-term looks like a stretch. It is not a business plan I would want to invest into right now. By contrast, Groupon’s diversification both complements the existing business and is relevant in an increasingly mobile Internet.
The article What Does the Future Hold for These “Dot-Com” Stocks? originally appeared on Fool.com and is written by David Gould.
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