1 Social Stock Frozen In Time Warp: Groupon Inc (GRPN), Zynga Inc (ZNGA), Electronic Arts Inc. (EA)

It is humorous then that Electronic Arts Inc. (NASDAQ:EA) recently settled its dispute with Zynga Inc (NASDAQ:ZNGA) over copyright infringement relating to The Ville copying The Sims Social. The outcome wasn’t entirely important; what is important, however, is that it came at a time when, ironically, AppData reported that The Ville and The Sims Social are not particularly popular on Facebook. That these two would squabble over weak titles is a testament to just how far behind the curve they have come.

And if you thought gambling was wacky, consider that Zynga Inc (NASDAQ:ZNGA) recently hired media executives to produce 30-minute animated episodes of FarmVille. What scares me about Zynga is that it appears to be stuck into a perpetual time warp. What may have been popular 5 years ago, especially on the Internet, is not necessarily popular today. And just like you can’t unscramble scrambled eggs, you can’t “reinvent” a broken product.

Conclusion & Stock Fundamentals

Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA) are both incredibly risky stocks to play. Making money on them is as much, if not more, a function of playing off of market emotions as it is a function of properly valuing the business. At any rate, Groupon Inc (NASDAQ:GRPN) is reasonably priced at 17.7x forward earnings and a free cash flow yield of 4.8%. It is still forecasted for growth rates north of 20%, which more than justifies a forward multiple above 20x at a discount rate of 10%. By contrast, it will take some time for Zynga to churn a profit–over the twelve trailing months, it burned $136 million worth of free cash low. Electronic Arts Inc. (NASDAQ:EA), which has generated more than $250 million worth of free cash flow over the twelve trailing months, is more ideal for social media game exposure. It is already well diversified in several different platforms ranging from consoles to online gaming, and it trades reasonably at 16.6x forward earnings for double-digit growth forecasts. It is at a 52-week high after rallying more than 70% from the lows. If nothing else, it hedges against the uncertainty of a Zynga Inc (NASDAQ:ZNGA) investment while providing exposure to a similar industry.

The article 1 Social Stock Frozen In Time Warp originally appeared on Fool.com and is written by David Gould.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.