By Therese Poletti, MarketWatch
SAN FRANCISCO (MarketWatch) — They were among the fastest-growing tech startups in the early days of the social media craze. But that was then.
Zynga Inc. and Groupon Inc. were both media darlings, touted for their fast-growing businesses and hefty revenue generation. Investors had reason to hope that this second generation of Internet companies would indeed be different from the dot-com bubble of 2000.
But big warning signs were apparent even before the 2011 initial public offerings of Internet daily deal firm Groupon Inc. /zigman2/quotes/207356672/composite GRPN +17.97% and game maker Zynga Inc. /zigman2/quotes/209662259/composite ZNGA -0.88% . The founders of each company cashed out huge amounts of stock in private, secondary market deals, well before their firms went public. Both companies also have dual-class stock structures, giving their founders control and shareholders little say.
Now investors are left holding the bag. Shares of Groupon, which went public in November 2011 at $20, have lost 70% since the IPO, while Zynga is off 71.5% from its initial offering price of $10 in December 2011. Both companies are in the throes of turnaround efforts, trying to reinvent themselves and prove their businesses are more than just early fads in the social media bubble.
/zigman2/quotes/209662259/composite ZNGA 8.97, -0.08, -0.88%
/zigman2/quotes/210599714/realtime SPX 3,193.93, +81.58, +2.62%
But patience among investors is waning, especially after last week’s disappointing results from both companies. Despite the departures of founders, layoffs and changes in business tactics and strategies, neither company has an impressive track record with Wall Street. Almost three-quarters of Groupon’s 11 earnings reports have disappointed investors on either the results or outlook, while just over half of Zynga’s results missed on those same measures.
To be sure, the turnarounds at both are taking longer than investors would like.
In Groupon’s case, the Chicago-based company is trying to evolve its daily deal business from email blasts to website offers, a far less costly way of generating sales. Groupon now is selling more discounted physical goods, with a distribution center in Kentucky. It hopes to became a major ecommerce player on par with eBay Inc. /zigman2/quotes/204653455/composite EBAY -1.09% and Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.91%
“Management has a sound strategy to get the business back on its prior growth trajectory but the pace of execution is still somewhat underwhelming,” said Jefferies analyst Brian Pitz, in a note.
Groupon CEO and co-founder Eric Lefkofsky sounded a positive note on the company’s conference call, saying “We made good progress in the second quarter,” and noting that close to 92 million users have downloaded Groupon’s new mobile app. Revenue grew 23% in the quarter, the second consecutive quarter in the double-digit territory, coupled with single-digit revenue growth in the first three quarters of 2013, but losses continued as spending increased.
But some wonder whether Groupon can actually fully transition. Its total traffic from its website directly, versus its email offers, is a paltry 10%. On Wall Street, 62% of analysts rate Groupon stock a hold, 29% say buy and 10% rate it a sell, according to FactSet Research.
In Zynga’s case, the company that started out creating casual games such as Farmville to play on personal computers is now trying to transition to a more mobile business. But for a hits-driven gaming business, the most recent quarter was particularly lacking in new games, with only the launch of Farmville 2 on mobile. And those results have been disappointing so far. Investors are also nervous about the outlook and its current product pipeline, with only a couple of games expected in the second half, and the bulk of new games not coming out until early next year.
Janney Capital Markets analyst Tony Wible also noted a decline in Zynga ‘s average revenue per user, denoting the possible loss of some of its big spenders, so-called “whales,” who spend a lot on virtual goods.
“The drop in ARPU [average revenue per user] is discouraging given the much anticipated launch of Farmville 2 this quarter.” Wible wrote in a note. “Lower ARPU may suggest the average user is losing interest or may be a sign Zynga is losing some whales while picking up lower-value players with new games.” Wall Street analysts have a harsh view of Zynga, with 75% rating it a hold, 10% a buy and 15% rate the company a sell, according to FactSet.
Before he was ousted a year ago, former Groupon CEO and co-founder Andrew Mason talked about how the company deliberately displayed a copy of a Forbes cover story on the company , along with cover stories of failed dot-coms, as a reminder of how fleeting success can be. If past track records are any guide, the glory days could be behind both Groupon and Zynga.
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