I was going to kick off this article with some of the economic vibes out of the EU, which are not that bad given that the world was supposedly ending just four to five weeks ago.
But instead, I'm going to go out on a limb and mention the unmentionables. Nope, I'm not afraid to utter the words Zynga (ZNGA), Groupon (GRPN), Facebook (FB), and the like. Actually for quite some time, the only one of these names I liked -- or more accurately, saw substantial potential value in -- was Facebook. I also have a call option sized position in Zynga, which in the $5s I thought I was stealing, and would quickly sell in the $6-$7 range. Wrong.
However, now I look at this whole space -- which to me is Facebook, Groupon, Yelp (YELP) and Zynga, as I've never spent any research efforts on Angie's List (ANGI) -- and the first thing that strikes me is the usual axiom about what happens when mass groupthink takes over in an investment area. Everyone is in love with the wrong name in the group: Yelp. And everyone is piling on popular commentary about how big a disaster these stocks are. Tell the world something it doesn't know. Moreover, any commentary that these names are going away is inane. The one thing most of these companies have done is raise billions in cash.
So, yes, they've been a train wreck, but only if an investor has a big stake in one or a few of these at the top. I still think Zynga in the $5s will make money, and now with all this "social media is dead" fervor I'm going to re-examine the stock. The one thing I do know is that Zynga is sporting more than half of its market cap in net cash, as opposed to Yelp, which is at around one-tenth or less. Right there, I'll buy Zynga all day long over Yelp.
Frankly, I prefer the long-term business model for Zynga, too, but it's not one I love. Digital/online gaming for a low price is going to be around for quite some time. But if one looks at the China market, it's a tremendous guide. This business has mysterious ebbs and flows. Moreover, this space is very economically sensitive and not recession proof, which has been long espoused.
In fact, I will elaborate on this point. Many of the pundit-driven aspects of social media spend are correct: The companies are fast movers, they have low overhead and high margins, etc. However, the "recession proof" aspect is 180 degrees wrong in a key way. Yes, a large portion of the ad driven/media spend is very sticky (thus highly recession resistant), but not the products for sale through many social media deals. In other words, all the heavily discounted stuff social media sites sell is highly cyclical. Note Priceline.com's (PCLN) recent results. High-end travel is much less economically sensitive. Discount, bargain based travel? Not so much.
Bottom line: Much of the social media spend that translates to final sales is more economically sensitive. Note Groupon's results last night. This is something the investment world will learn and then report on in about one to two years. In the meantime, the media mainstream outlets will do the pile on thing as they always do. I say let them, and I'll just pick my spots and prices out of the very best assets.
So onto the names in brief. I'll be doing more work here in the upcoming days and weeks since I do think the group will offer a fair amount of time to pick away at very compelling entry points.
Since this is the best of breed in the group, I've been on it first and I'm also not losing a bit of sleep over Facebook's stock action. People simply don't understand this name, even though they think they do. As I have written in the past, they are focusing on the wrong metrics. Again, Google = numero uno in future mobile ad domination. Facebook = number 2, which will still be exceedingly valuable. It's more complicated than that, but that's good enough for now as I've offered plenty other future catalysts and valuation justifications. And I will savor any price entries below $19.50.
At first blush, I'm now leaning to this name as the potential next in line after Facebook in the social space. The caveat is that after Facebook, I think the quality drops off a lot. And, yes, that's partly because Twitter isn't public yet. And, yes, now my economically sensitive vibes/thesis from above kicks in. Groupon's offerings are very tied to people's willingness to spend some frivolous money. In fact, I'd say that Groupon's stock will likely be viewed as a hyper-cyclical name in time. During upswings, it will probably blow numbers out (see Priceline). And visa versa, in even mild downswings.
Again, I've just started doing some in-depth work here, but I'm not seeing any fundamentals to justify the big selling today -- given the previous drubbing down to $7 and the fact that the company missed by less than 1% on the revenue line and on the midpoint of guidance. The valuation was already around 4x net cash, and it's fast approaching 3x net cash. Under 3x net cash, and this will be ridiculously cheap. The drubbing is occurring because (as I tweeted last night
), the machines are going to push hard to see if they can break the $5 print. This forces more margin selling. This is what I would like to buy into, a break of the $5 print. If it holds above the $5 mark for a few days then I'll have to reassess my plan, but I think the stock is worth at least $10-$12 in a rational market and after the machines have moved on to something else.
Frankly, I wish I had waited and not entered any of this, because I think this is the day I would have started buying these shares. In fact, it looks like a firm bottom is now in. For emphasis, this company has about $1.6 billion in net cash against a $2.3 billion market cap. Unless you believe that it will never have a hit game again, this is already in deep value territory. So why don't I have Zynga behind Facebook, and ahead of Groupon? To be honest, I view the long-term growth potential of Groupon as superior. And the fact that Google is no slouch when it comes to evaluating M&A, and it was willing to go to $6 billion for this company. That is notable and should not be lightly overlooked.
Bottom line: While everyone is likely pounding their chests and saying or writing all sorts of negative things on this group today, I looking for opportunities and view the selling and pure investment hatred for this space as getting closer to an extreme.
Author holds positions in GOOG, FB and ZNGA
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