Zynga Inc (ZNGA) Needs to Draw Something…

There are many good companies that I would like to invest in, and there are some companies that I would stay away from. Social media is an industry that has always been a red flag for me. There really hasn’t been a company that has separated itself from the rest in regards to its services. The following companies are tied closely together, and I still have my concerns on whether they are a good investment.

For those of you that have read or listened to Warren Buffett, you are well aware of his stance on companies needing a durable competitive advantage. He is adamant about investing in companies that are doing something nobody else can/will/is doing. Even if other companies are doing the same thing, is there really any hope of them catching up with the industry leader? If so, he likely wouldn’t invest in it.

Yes, Facebook Inc (NASDAQ:FB) has nearly 1 billion users, but does it offer anything different than its competitors? Other forums such as Google +, Twitter, and LinkedIn, offer similar products/services for free. More and more people are joining these other sites daily, but Facebook Inc (NASDAQ:FB) still manages to grow — at least for now. Let’s look at reality for a second. Besides having more users than its competitors, how does it separate itself from the rest of the industry? Now, I know Facebook made a historically bad impression with its IPO, but it may actually be in a better position now.

With $1.97 billion of revenues in 2010, the company may see revenues triple by the end of this year. However, the company shows a dismal FCF yield of just .62%. Not exactly the type of investment a bargain hunter would enjoy. I know, that is only one metric. However, Facebook’s earnings per share (EPS) are as close to zero as you can get despite showing .43 in 2011. The stock plummeted after its IPO, rebounded, but has fallen again. It’s down nearly 33% over the past year and nearly 4% YTD.

One company that is tied very closely to Facebook’s success is Zynga Inc (NASDAQ:ZNGA). Zynga Inc (NASDAQ:ZNGA) is dependent on social media companies (and other companies of that sort) to survive. They use these sites to market gaming products. This isn’t exactly the largest durable competitive advantage I’ve seen in my lifetime. Zynga needs help, but where should they look?