The Ides of March: 4 Tech Stocks That Could Get Stabbed in the Back

The Ides of March is well-known in modern times as the day that Julius Caesar was assassinated by his Senatorial "friends." As the story goes, despite several warnings by a soothsayer that Caesar would be harmed by no later than the Ides of March, he did not heed those warnings and wound up slain at the hands of his those he did not consider a threat.

This story, while laden with superstitions as deep-rooted as a black cat crossing one's path, does serve as a possible cautionary tale about today's stock market. The way I see it, there are several companies in the tech sector that are giving off glaring warning signs that their business models may be unsustainable -- and, like Caesar, investors are largely ignoring those warnings. If they aren't careful, these shareholders could wind up getting stabbed in the back by the stocks they trust.

Today, I intend to look at four tech-based companies not to praise them, but to bury them. While I claim to be no soothsayer, here is what my crystal ball doth proclaim about these four companies and what should make you very wary of their business models.

Groupon (Nasdaq: GRPN  )
The concept is novel: Take a group of small-to-medium sized businesses that are struggling to attract customers through normal means of advertising and offer them a medium with which to connect to new customers. Groupon, without question, has revolutionized the social couponing business -- but being first does not always translate into being the best, or even being successful over the long run, for that matter.

Groupon's business model appears to be extremely easy to duplicate and the barrier to entry is practically non-existent. According to Yipit, in June of last year there were more than 400 daily deal websites with at least 1 million users. However, despite the competition, comScore estimates that Groupon and LivingSocial control roughly 90% of the market share -- but for how long? Amazon.com has thrown its bet behind LivingSocial's success and we're witnessing about five new daily-deal sites starting up each week. This is a numbers game that the currently unprofitable Groupon seems bound to lose.

Angie's List (Nasdaq: ANGI  )
While Groupon's concept is at least novel, this one has me scratching my head. Whereas you can go to Yelp, Google, or FourSquare and receive business reviews for free, Angie's List relies on charging its members to give reviews of contractors and services they procure. The idea that businesses themselves can't be members and, therefore, that unbiased reviews of these businesses would follow seems great on paper but translates miserably to the bottom line.

In fact, it translates so poorly that Angie's List hasn't been profitable in 16 years. There's just no way to sugarcoat the fact that the company's spending continues to outweigh the benefits of adding customers. In order to run its daily operations, the company has resorted to equity offerings in the past and at the pace Angie is spending its cash, it may not be too long before it's back in the same boat. It's very difficult to win against free competition, and Angie's List doesn't bring enough to the table to differentiate itself from the group.

Pandora Media (NYSE: P  )
Pandora may have won the battle, but I still think I'll win the war. Back in June I predicted that Pandora would never turn a profit. It has, in actuality, posted two very small quarterly profits, but I still feel I will be vindicated over the long-term, since its business model presents few avenues of growth.

Pandora's growth dilemma came to a head last week, when the company warned that losses and lack of growth would be far worse than Wall Street had been predicting. To most investors this came as a surprise -- but not to me. Pandora's biggest dilemma is that the only way it can drive future growth is through advertising. The catch-22 here is that consumers were drawn to Pandora's service because they became tired of the endless advertising on traditional AM/FM radio, and the only way Pandora will be able to increase revenue is through more obvious advertising.

Not only is Pandora risking its consumer base by advertising more, but as Fellow Fool Rick Munarriz noted recently, its popularity may be waning anyway. In terms of download popularity on the Kindle Fire, Pandora's music app clocked in at a pathetic fifth, behind Clear Channel's iHeartRadio and music-licensing behemoth Vevo. There are numerous options now for online music databases, and SiriusXM continues to be the medium of choice for those who want more than just radio. There's simply no room left for Pandora.

Zynga (Nasdaq: ZNGA  )
Facebook-mania is upon us and investors are flocking to anything associated with the social-networking site, thinking it could become the greatest thing since friendship itself. Of course, if "ifs" and "buts" were cherries and nuts, we'd all have a Merry Christmas. But they ain't.

Zynga is looking more and more like a sucker's bet, joined at the hip to Facebook for 90% of its revenue. Even with the recent launch of Zynga.com, Facebook holds enormous negotiating power when it comes to Zynga's social media platform and how revenues could be split in the future. I also find it incredibly discomforting to know that 97% of its customers are non-paying.

Now add to this that Electronic Arts (Nasdaq: EA  ) is moving into social gaming on Facebook as well. According to EA's vice president Jeff Brown, video-game development costs could rise 200% for the next-generating gaming consoles. Personally, I'm left wondering if Zynga has a deep-enough wallet to survive. Unsurprisingly, Zynga did file for a $400 million secondary offering yesterday. Although I always raise an eyebrow at this kind of thing, reports indicate that this is largely an effort to give pre-IPO shareholders a chance to sell parts of their holdings. With little differentiation from similar sites, I see little advantage to Zynga's gaming platform.

Foolish roundup
I didn't mean for this to be a class of 2011 reunion, but the quality of IPOs last year left a lot to be desired. Many businesses simply don't have any barriers to entry or differentiating factors that make them a more-preferable choice than a sea of potentially cheaper alternatives. If you invest in these four tech companies, you run the risk of being stabbed in the back, plain and simple. Et tu, competition? Then fall your stock.

Disagree with me? Sound off in the comments section and let your fellow Fools know where you stand.

While these stocks may not have staying power, there is one company that our senior technology analyst Eric Bleeker feels could be set up for success in the mobile sector. Find out for free what company he feels will take advantage of the Next Trillion-Dollar Revolution.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He will not visit your farm so don't bother asking. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services have recommended buying shares of Amazon.com and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always looking out for your best interests.


Read/Post Comments (6) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2012, at 8:43 PM, veryfood wrote:

    Zynga has $1.8 billion in cash, and is only doing the secondary for selling Class B shareholders, company gets no money, so what are you talking about?

  • Report this Comment On March 15, 2012, at 9:18 PM, xenojoey wrote:

    The author of this article obviously did not research before writing this misleading article with respects to ZNGA. The second offering has nothing to with ZNGA needing cash. In fact, they don't get any cash from the second offering. It is only to prevent selloff from the lock out date expiration. You are a fool.

  • Report this Comment On March 15, 2012, at 11:31 PM, accelerando wrote:

    What said about Pandora is equally true about Facebook. Users deserted myspace because it became clogged with advertising. They went to facebook because it wasn't. Facebook can only increase revenue by increasing advertising. Which will cause users to desert it. A catch-22 that has no solution. In ten years there will be no pandora, no facebook and very possibly not much amazon (which has a similar dilemma) These are all companies that have built large bases of loyal users but have no real way to monetize that base without alienating the base (in amazon's case by raising prices to turn a reasonable profit).

    For my money these are all examples of elaborate wall street scams -- where the entreprenaurs build beautiful looking business and get mega-rich, but have no real underlying model that will allow reasonable profits. The sucker retail investors are left holding the bag, having enriched the Bezos and Zuckerbergs of the world and ultimately gotten nothing in return.

  • Report this Comment On March 16, 2012, at 11:55 AM, sikiliza wrote:

    Pandora will need to pull a rabbit out a hat to survive. As a user I find myself switching over more frequently to Last.fm which has been around for quite some time. The reason may be that Pandora's algorithm does not "learn" and thereby plays the same tracks at almost the same sequence for a given radio selection. That is a death knell when your core customers are as fickle as I am.

    That's the technical bit. Pandora pays content owners at a cost per play while it sells advertising based on a fixed campaign fee (say $100K) that then gets spread across ad impressions. This is what people fail to understand. Pandora, YouTube etc all receive their advertising dollars based on a fixed campaign and then they allocated ad impressions across these ad dollars thereby creating a Cost per Impression. Of course they have a minimum ad charge per impression for advertisers but that is neither here nor there.

    When you have costs that scale with activity while your revenues are pretty much fixed, you are in trouble.

  • Report this Comment On March 16, 2012, at 11:56 AM, sikiliza wrote:

    Pandora will need to pull a rabbit out a hat to survive. As a user I find myself switching over more frequently to Last.fm which has been around for quite some time. The reason may be that Pandora's algorithm does not "learn" and thereby plays the same tracks at almost the same sequence for a given radio selection. That is a death knell when your core customers are as fickle as I am.

    That's the technical bit. Pandora pays content owners at a cost per play while it sells advertising based on a fixed campaign fee (say $100K) that then gets spread across ad impressions. This is what people fail to understand. Pandora, YouTube etc all receive their advertising dollars based on a fixed campaign and then they allocated ad impressions across these ad dollars thereby creating a Cost per Impression. Of course they have a minimum ad charge per impression for advertisers but that is neither here nor there.

    When you have costs that scale with activity while your revenues are pretty much fixed, you are in trouble.

  • Report this Comment On March 16, 2012, at 3:40 PM, racchole wrote:

    Two comments about the Zynga's cash holding (which is insignificant because Facebook can always bail them out with a loan), and nothing is said about the most important key metric: 97% non-paying customers. How does anyone believe that ZNGA will earn anywhere close to $1B per year from every 3/100 people?

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