Groupon, Zynga and Facebook. What do these companies have in common? It’s simple – they were wonderful growth stories that captured the imagination of investors and speculators alike. They were the stocks to buy in the technology sector. However, as with all good things, the infatuation with the shares in these companies has all but ended. Some have speculated that this is the beginning of the end of the Web 2.0 bubble.
How did this happen? Groupon’s business model was never considered stable for long-term growth as there were such few barriers to entry. It seemed that every time you checked your email, there was another daily deal service trying to sell you a massage or pole dancing classes that you didn’t need. What was more concerning were the emails that started arriving from companies that were building a business model upon consolidating the daily deals from Groupon and a number of similar companies. This was a clear indicator that anyone with a sales team that was willing to cold call every restaurant in the city could be a daily deal business. Groupon’s fortunes are not expected to improve without some serious changes to its business model and for that reason investors should reconsider it for their basket of technology stocks to buy.
Zynga is another example of a company whose stock price has dropped off a cliff ever since it went public. This company has all kinds of issues from being sued by investors who did not appreciate the shortening of lock out period for executives to sell their shares to infringing or outright copying of games. Some executives had their lock out period shortened so that it would expire prior to releasing first quarter results. This fueled speculation that those in charge at the company knew that the Q1 results would be poor and, therefore, sold significant amounts of their holdings prior to that. If that wasn’t enough, Electronic Arts is now suing Zynga for copying the “The Sims: Social” game. And, if that wasn’t enough, the company’s C.O.O, John Schappert is leaving. This company looks like it’s scrambling to control the damage. With all of this happening, do you really think that it should be one of your stocks to buy for the next quarter or next five years?
Facebook. The granddaddy of them all. If we had surveyed 100 people last year, we bet that 99 of them would have listed facebook as one of their top stocks to buy. Oh, what a difference a year makes. After an inauspicious beginning on the first day of trading, the stock has continued its downward spiral. This was shocking to some but should it have been? Let’s look at the facts. Facebook is a social network and people are always looking for the next great thing. So, when the next Facebook-like social media company comes along, this company could be in trouble. Anyone remember MySpace or Friendster?
Facebook has also fallen behind significantly on its mobile advertising strategy, while acknowledging that a significant portion of its members access the site on a mobile platform. This oversight could turn out to be very costly and investors have already priced the shares at a level where there is little margin for error. So, any missteps from here on could mean another hit to the stock.
These technology companies have hit more than a rough patch because serious deficiencies in their business models have been exposed. Should they still be considered stocks to buy for the long term? The answer could quite possibly be yes but you’ll need your antacid close by because it could be a bumpy ride for the next few months.