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Which Web 2.0 Stock Is Rising From the Ashes?

Tuesday - 12/11/2012, 1:46pm  ET

A lot of beaten down stocks in the tech sectors have seen renewed interest off late. Be it Web 2.0 companies like Facebook , Groupon and Zynga or hardware companies like Research in Motion, Nokia and Dell.  I have already covered Research in Motion and Nokia in a previous article. In this article I will be focusing on Web 2.0 companies: Facebook, Groupon and Zynga.

Facebook: Improving mobile monetization is the key

Facebook’s share price saw its bottom in early September at $17.55. The stock is recovering since then and is at ~$27.50 now. First catalyst for this share price recovery was Mark Zuckerberg’s comment at Techcrunch conference where he said that mobile would make more money for the company than desktop in the long term. After that the company reported good quarterly numbers beating estimates with mobile business showing exceptional growth. It appears like things are going in the right direction for the company and its prospects continue to improve. The company is on a path to continue doing better than consensus estimates with further monetization of mobile news feed inventory and new business opportunities from introduction of Facebook exchange. The company is also likely to see multiple expansion as investors become more confident about the company’s prospects. I find the risk reward profile for the stock attractive at current levels.

Groupon: Low valuation makes it an attractive buyout candidate

Groupon is currently trading at a forward PE of 17.27x. The company posted its first profitable quarter in the current year and is expected to post 41% EPS growth next year according to consensus estimates. Things continues to get less worse for Groupon and a lot of smart hedge fund managers seems to be entering the stock. Chase Coleman’s Tiger Fund recently disclosed a 9.9% ownership stake in the company with 65 million shares. The company had been under attack from short sellers ever since its IPO and some have referred to it even as a Ponzi scheme.

Although I do agree that the company’s valuation was a bit high at the time of IPO, I do have faith in company’s business model. After the year to date correction, the company is now trading at less than half the valuation which Google offered it for a buyout before it went for an IPO. There are rumors in the market that Google might again bid for Groupon. I see there is a good possibility given Groupon’s low valuation and synergies it brings to Google. Groupon’s customer base of small local businesses would be a key positive for Google to leverage. I believe the stock can see good upside if its business fundamentals continue to improve and/or if it sees a bid from Google.

Zynga: Financials and business fundamentals- both on decline

Zynga is one stock in the above list where I am bearish. The company is consistently seeing top and bottom line declines. The company’s EPS is expected to decrease from $0.24 in the last year to $0.03 in the current year according to consensus estimates. Although sell side consensus is expecting a positive EPS for the next year, I remain skeptical and believe that the company can turn red next year. Failure to launch any compelling new games, the end of its contract with Facebook and users losing interest in older games are the key reasons I am bearish on the company’s prospect. The recent departure of the company’s CFO (Dave Werner) has added more fuel to the fire. I believe the only hope which remains for Zynga’s investors is if the company gets acquired given its vast user base and leading position in Social gaming. However, I would not like to bet on it and hence recommend avoiding the stock.

To sum up, Facebook and Groupon are both good buys given their improving fundamental outlook. Groupon is also a good acquisition target. Zynga on the other hand is in a mess with declining financials as well as deteriorating business fundamentals, hence one should avoid it.

 

This article was originally published as Which Web 2.0 Stock Is Rising From the Ashes?on Fool.com

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