Weekly Stock Performance
The social media sector performed well this week, with an average gain of 3%, mainly on the strength of FB (through more positive coverage) and Pandora (ahead of its earnings next week). Media speculation on GRPN and changes to ZNGA’s partnership with FB resulted in daily volatility of those stocks, but the news did not provide any fundamental changes that should impact their securities as discussed below.
Change Since Nov. 23
Change Since Nov. 23
- FB announced a series of amendments to their agreement with ZNGA that removed preferential partner terms, meaning that ZNGA will be subject to FB’s standard developer terms of service.
- Although FB notes that it is not planning to develop its own games, the amended agreement allows this possibility in the future. Key changes for ZNGA include its freedom to use other social platforms on Zynga.com for both logins and payments systems, and the removal of requirements to display FB’s ad units on Zynga.com.
- Though ZNGA can now attempt to better leverage its brand across other platforms, much of the Q3 weakness for ZNGA was due to the continued shift of FB’s users to mobile, so the key for a turnaround in ZNGA remains to develop a significant and sustainable mobile gaming portfolio.
- With ~$1.80 of cash per share, ZNGA is trading at a technology value of roughly $0.66 per share. Although the downside to the stock is limited beyond cash, with numerous key executive defections in the past two quarters and with an overall terrible performance in 2012 thus far, it is difficult to have confidence in the company’s ability to execute a turnaround in the next several quarters.
- There was a flurry of media speculation this week that CEO Andrew Mason would be fired, but after a board meeting, there were no executive changes made. At a conference, Mason addressed questions regarding these rumors and signaled his confidence in the business and his continued leadership.
- Mason also noted the strength of the company’s growing ecommerce platform, Groupon Goods (even though this business has resulted in lower overall margins for GRPN). Mason also specifically noted that despite the success of Goods, the company did not intent to build out a shipping/fulfillment logistics platform.
- The international segment remains the key problem for GRPN and addressing these issues by optimizing its deal mix, rolling out better technology platforms, and improving overall execution will continue to take time as the overseas business has historically been patched together. A new CEO with experience in effectively running a global enterprise would likely unlock some pressure on the stock.
- Despite GRPN’s recent guide to reacceleration in both billings and revenue growth for Q4, negative sentiment on the stock continues and was exacerbated by news that LivingSocial (its primary daily deals competitor) fired 10% of its workforce in an effort to focus more on mobile after a poor Q3 performance. If GRPN does indeed show improved international and overall reacceleration in Q4, the stock price will likely react positively irrespective of any potential CEO changes.
Key Developments in Social & Internet
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