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Groupon’s CEO Finally Gets The Boot; Now Are These Disastrous Social Stocks Worth Another Look?

Suzanne McGee

Not too many months ago, investors were lumping together stocks like Groupon (GRPN) and Zynga (ZNGA) as two of a kind, part of the Facebook-era wave of newly-public social networking companies to make their debut only to see their stock prices dive below the IPO price within days or weeks. If anything, investors found more potential in Groupon, with its daily deals business, than in Zynga, the online game company whose fate appeared tied to its ability to get Facebook (FB) users hopelessly addicted to playing Farmville online for hours at a time.

GRPN Chart

Something seems to have changed in their relative merits in the eyes of investors in the latter half of February, however. Groupon’s disappointing financial results delivered the final blow to Andrew Mason, whose long-rumored exit (see here and here) finally came to pass. Good thing he’s got other experience, like working at a sushi joint. Meanwhile some have begun to view Zynga’s efforts to push into the world of ‘real money’ gaming with a slightly increased level of optimism.

Certainly, Groupon’s problems seem to be gaining momentum. Its profit margins have never offered investors a reason to own the stock, and that hasn’t changed. The company’s losses are growing: earlier this week, it announced a fourth-quarter loss of $81.1 million, larger than the $65.4 million it lost in the year-earlier period, and although the company’s revenues did surge 30%, that didn’t help profits and the gain was smaller than analysts had been expecting.

GRPN Cash from Operations Quarterly Chart

Both Groupon and Zynga are trying to reconceive their business models. In Groupon’s case, that means making a push into direct sales of goods, not just offering discount coupons. But this initiative – even if it works out in the longer term – means higher costs in the interim, as Groupon must pay to acquire and store the goods it sells.

Just as Groupon wants to shed the label of being no more than a daily deals company, Zynga hopes to move from online games (most of which are accessed via Facebook) into online gambling with real money. Its stock is rallying on news that New Jersey is following the lead of Nevada: governors of both states in the last ten days have signed bills legalizing various forms of online gambling, and Zynga’s new fans are betting that it will be one of the early winners when some kind of national ‘real money’ gambling system starts here. Waiting for that day, Zynga isn’t just sitting idly by; it plans to launch a ‘real money’ gambling site with a local partner in the UK by this summer.

But betting that Zynga can convert its estimated 15 million “play for fun” poker players into real gamblers – or that it will be allowed to do so in a way that is easy to manage and profitable – is a different kind of gamble. There are a lot of hypotheticals in place: perhaps the states will make it straightforward and not too costly for companies like Zynga to forge ahead with their plans; perhaps Zynga won’t face cutthroat competition…

Both of these companies continue to look like big bets on unproven market concepts that differ from the business models that they highlighted to potential investors at the time they went public. While the market today may be starting to sour on one and embrace the other, the odds are that both are too high risk to add to a portfolio that you hope will gain ground any time soon.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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