Predicting an IPO can be tricky business, there is no doubt about it. Sequoia partner Roelof Botha said, “If you miss in the first six months of being a public company, you’re in the penalty box for a very long time. If you beat too much, you’re an idiot because you should have forecast higher.” Unfortunately for Facebook Inc (NASDAQ:FB), it has been in the penalty box for just over a year. However, Facebook is not the only company struggling to provide value to its shareholders.
The bad
Facebook Inc (NASDAQ:FB)‘s IPO still leaves investors with a bad taste in their mouths, and the company’s stock is still down almost 38% from its initial price. I don’t believe that the company’s business model gives it a durable competitive advantage over other social media sites, but its certainly better than Zynga Inc (NASDAQ:ZNGA)‘s. Zynga Inc (NASDAQ:ZNGA) is a company that either succeeds or fails based on its partnerships. It’s not dependent on itself, but rather on others. Groupon Inc (NASDAQ:GRPN) may actually have the best business model of these three companies, but that doesn’t mean that it has performed well or provided investors with a superb valuation.
All of these companies have experienced pitiful performances in the past year. I would announce a company I thought has done better than the rest, but why? The best performing stock since Facebook Inc (NASDAQ:FB)‘s IPO has been Groupon Inc (NASDAQ:GRPN) – its “only” down 35%, compared to Facebook and Zynga Inc (NASDAQ:ZNGA) who have both dropped 38% and 60% respectively.
Young valuations
Typically, investors (including myself) look at metrics such as free cash flow, price-to-earnings ratios, and different types of yields. To be short and sweet, all three of these companies have awful valuations if measured by those metrics.
As an investor, I wouldn’t typically want a company as young as these three to have a boat load of cash. Every company deserves time to grow, and if in this short period of time these companies had already maxed out their markets then I would be disappointed. I do not believe that this is the case now. I want a young company to be spending money with the intention of growth. Both Zynga Inc (NASDAQ:ZNGA) and Facebook Inc (NASDAQ:FB) have free cash flows that are in the negatives, while Groupon Inc (NASDAQ:GRPN) only has $94 million in its name.
One way to measure this is to examine their capital expenditures (Cap Ex). The cash that the company has will hopefully be spent in this area. If you couple the free cash flow levels with that of Cap Ex, it becomes obvious that these companies are doing just that. From 2010-2012, Facebook’s Cap Ex spending has increased 422%, much less than Zynga Inc (NASDAQ:ZNGA)’s 572% increase. Groupon Inc (NASDAQ:GRPN) might be the business to follow in this regard; its Cap Ex spending has increased by 600% and, as previously mentioned, it actually has a free cash flow above 0.
Earnings? Almost non-existent. Facebook Inc (NASDAQ:FB) is the only one of these three companies to show positive earnings per share.
Are they stronger?
I don’t think that Zynga Inc (NASDAQ:ZNGA) was ever strong. How can you have a strong business when you are almost completely dependent on other businesses? It has done nothing to change that, meaning that it is just as weak now as it was before. Groupon has acquired approximately 17 million users since the beginning of 2012, bringing its total to over 50 million. Facebook Inc (NASDAQ:FB), on the other hand, has 1.1 billion users. The numbers for both companies are probably exaggerated, of course. Can we really count people’s dogs, cats, fish, and long lost siblings that were never born as actual users?
“I can’t speak to the stock price, but I do feel strongly that we are a better positioned, stronger company than we were a year ago,” said Facebook’s chief operating officer, Sheryl Sandberg. Why do I agree? CEO Mark Zuckerberg has made it obvious that the company has a new mission – to keep up with shifting user habits and hold a dominant grasp on smartphones and tablets. Facebook is figuring out how to do mobile, which is huge.
The foolish bottom line
So, have these companies really become stronger? I believe that Groupon Inc (NASDAQ:GRPN) and Facebook have made some moves, changed their directions, or simply become stronger with the help of their users. I simply don’t see how Zynga Inc (NASDAQ:ZNGA) will find a long-term answer with its dependency issues, though. With as prevalent as the mobile market has become, however, Facebook Inc (NASDAQ:FB) and Groupon Inc (NASDAQ:GRPN) could find plenty of opportunities if they continue to maximize their efforts in that area
The article Are These Companies “Stronger Than Ever”? originally appeared on Fool.com and is written by Tyler Wofford.
Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Tyler is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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