Is Facebook luring money away from these stocks?

The social network's upcoming IPO appears to be 'zucking' the air out of other well-known Internet companies.

By Wall St. Cheat Sheet May 10, 2012 9:29AM

Facebook recently revealed that it is targeting a market value of as much as $96 billion, offering shares at $28 to $35 each. The world's largest social networking site is scheduled to hold its initial public offering on May 18 and is set to become the most valuable U.S. technology company at the time of an IPO, far surpassing Google's (GOOG) $23 billion valuation in 2004.


At a market value of almost $100 billion, Facebook would already rival well-established Internet companies such as Amazon (AMZN).

On Monday, Facebook co-founder Mark Zuckerberg launched a cross-country roadshow to pitch shares and build excitement. The media reported about hundreds of institutional investors standing in long lines to hear the pitch.

Although Facebook is lighting a spark in the IPO markets, it appears to be zucking the air out of other well-known Internet companies.


While heavyweights such as Google and Amazon are still holding steady, the past three months have not been kind to the younger Internet stocks. As investors prepare to free up funds for Facebook, which touts a user-base of over 900 million people, these companies have become deflated.


Zynga (ZNGA): The social network game development company is perhaps the strongest derivative of Facebook. In a filing with the Securities and Exchange Commission earlier this year, Facebook said the FarmVille creator accounted for approximately 12% of the company's revenue in 2011.

However, over the past three months, shares of Zynga have plummeted 43%. On Tuesday, shares continued to fall after Electronic Arts (EA) chief executive John Riccitiello suggested that Zynga overpaid for its $180 million-plus purchase of OMGPOP.


Groupon (GRPN): The deal-of-the-day Internet company has more problems than just Facebook walking into the room. As we warned last June, Groupon could be the worst public investment ever. After once trading above $30, shares are currently near $10, having lost almost 60% of their value in the past three months.

The company has been hit hard with SEC accounting inquiries and insiders dumping shares. Groupon had to restate earnings results after finding "material weakness" in its accounting controls. This clearly violates our H= 'Honest Accounting Governs the Company Books' requirement in our Cheat Sheet investing framework. Furthermore, Facebook is constantly trying to crack into the online deals space and may be successful at any moment.


Yelp (YELP): The San-Francisco based social networking company provides user reviews on everything from restaurants to shopping. Although the company boasted an average of approximately 71 million monthly unique visitors in first-quarter of 2012, it hugely fails in comparison to Facebook's 500 million daily users.

Shares of Yelp have declined more than 15% in the past three months. Last week, the company reported a wider loss of $9.83 million for the first-quarter than the $2.75 million loss a year earlier. Yelp is having to spend more on marketing in order to expand its user base and attract more advertisers.


Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.


More from Wall St. Cheat Sheet

May 10, 2012 11:26AM
Smile The pie had gotten smaller and smaller because the insiders took and ran away with a big chunk of it. What's there that is hard to understand? Smile And so the gyrations of the crap trash filthy junks rat trap economy continues. Nerd
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