Facebook climbs as other social stocks crash

Zynga, Pandora, Groupon and others face a triple whammy of Zuck's IPO, broad uncertainty and individual struggles.

By InvestorPlace May 18, 2012 12:56PM

By Jeff Reeves


While Facebook (FB) was rising in its trading debut Friday, its social media cohort Zynga (ZNGA) was crashing


After a decline of as much as 13%, shares were briefly halted from trading midday Friday, putting the shares down about 25% on the year and down 50% from a peak of almost $16 in early March.


The shares rebounded when trading resumed, before a second freeze. This afternoon, they're trading again near the day's lows.


And Zynga was just one social media stocks diving as Facebook stole the spotlight. Pandora (P), Groupon (GRPN) and others are seeing shares decline sharply on a triple whammy of problems, of which the FB IPO is just one.


The big reason for the sector-wide struggle? Well, there isn't really any news out there other than the typical macroeconomic headlines about trouble in Europe and persistently high unemployment. So the simplest explanation is a Facebook effect, whereby traders who were looking for a one-off on Facebook have been freeing up capital to go plow their money into actual FB stock now that they have the chance. Heck, there are even those on Wall Street who think the reason Apple (AAPL) has seen headwinds this week is that investors are freeing up cash for FB shares.


There's also the fact that Facebook isn't going to the moon as some analysts had thought. After being priced at the high end of its range at $38, the stock has tacked on a nice premium but certainly isn't delivering an instant doubler like some FB fanboys had hoped.


In short, all eyes are on Facebook and secondary social media stocks are left out in the cold.


But that's only part of the story. The other part is the very real struggle for companies like Zynga, Groupon, Pandora and others in the current environment. These stocks have no concrete growth plans, as well as difficulty turning profits from mobile devices and even some trouble doing math. Groupon restated earnings in April, and Zynga restated sales last year.


I don't want to get lost in the weeds too much on every social stock, but look at some recent headwinds for Zynga to illustrate this point: 

  • Last week Cowen & Co. analyst Doug Creutz wrote in a research note that Zynga's daily active user base fell by 12.5% in April. He was bearish on the stock, pointing to increased competition in the gaming world.
  • The $180 million purchase of Draw Something developer OMGPop in March was meant to bridge the gap from desktop to mobile gaming and fend off ZNGA rivals. However, some have hinted that Zynga paid too much for the firm in a knee-jerk bid. Several analysts have also noted that the daily users of Draw Something had fallen since April, fueling such talk.
  • Without backing out compensation costs, the Zynga earnings in April included a net loss of $85 million and hinted at trouble plotting future growth.

Get the picture?


It's a perfect storm for companies like Zynga. Investors are scared of the stock market in general, Facebook is sucking all the oxygen from the room, and bad headlines that have weighed on the stock are only fueling a sell-off.


So what will happen from here? Well, the financial media will eventually slow down the hype machine over Facebook, and investors will get back to business as usual.


Unfortunately for Zynga and some of these other struggling social media stocks, business right now just isn’t very good.


Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace​​.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.



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May 18, 2012 1:50PM
FB Soars????!!!!  What have you been smoking?
when a stock opens at 45, drops to 38 and then never regains the opening price i would not say is soars. it has held somewhat stable. but for the hype aroud this IPO it is not doing well....
May 18, 2012 4:09PM
The sheep must be overjoyed.  Goldman and Morgan brokers are rich, Zuckerberg is rich, and everyone else's 401K is poorer.  This is really demented.
May 18, 2012 3:44PM
May 19, 2012 7:53AM

So I registered on FB last year, but all I saw was a bunch of people yacking about notihing of any importance. I'm not at all surprised at FB's performance. Clearly my preference is Guns and Gold, but I do collect quality stocks that pay a covered dividend and even better if they have a record of increasing the dividend. Water companies and Pipelines are nice. So what's FB got? Hot air and gibberish in the clouds!


I think while you're all focused on FB, I'll go buy some more Gold while it's having it's big annual sale. Anybody remember how Obozo, Bernake, Greece, Portugal, Spain, Ireland and now the French are destroying the US and World's Economy?


If you think FB's performance yesterday was unspectacular, just wait until the waiting period is up in the relaxed 90 days and all those underwritters and insiders start dumping the stock. And didn't I read the underwritters were in there buying to support the price? What might it have dropped to, if someone wasn't supporting it? Woof!


Yea, Yea, the Rich get richer....maybe!


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