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Another Social Networking Horror Story

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Stocks are in the black this morning with the Dow (DJINDICES: ^DJI  ) and the broader S&P 500 (SNPINDEX: ^GSPC  ) up 0.2% and 0.1% at 10:02 a.m. EST.

The long view: Bloomberg has a very interesting profile of eccentric (and highly successful) bond investor Jeff Gundlach of Double Line that's worth reading. Here's a taste of his wit: Gundlach does the Saturday New York Times crossword puzzle, but skips Sunday because he finds it too easy, comparing it to counting Cheerios in box: "You can do it, but what's the point?"

The micro view: Yesterday, in this column, I highlighted some of the problems with "investing" in Groupon, and I wrote that there was reason to believe the stock would decline today (which looks on the mark, with the stock down 7.5% at 10:04 a.m.). Today, it's time to turn our attention to two other co-dependent social networking stocks: Facebook (NASDAQ: FB  ) and Zynga (NASDAQ: ZNGA  ) .

Just prior to Facebook's IPO, I wrote that the share of its revenue attributable to Zynga was an underappreciated risk factor. After regular trading hours yesterday, the two companies announced in separate regulatory filings that they had amended their agreement with each other to reduce their co-dependency. Zynga will no longer need to use Facebook as its sole social networking platform or grant Facebook exclusivity on its games. Facebook, in turn, will be able to develop its own games starting in March.

Let's be clear: Zynga is the junior partner in this relationship and needs Facebook more than Facebook needs it. Today's price action reflects this, with Zynga shares losing 7.2% at 10:02 a.m., while Facebook is down less than 1%. Furthermore, one of the grave shortcomings of Zynga in terms of an investment is that, like Groupon, it lacks a durable competitive advantage.

Facebook is a better business than Zynga. To get a comprehensive assessment of the risks and opportunities the pre-eminent social network faces, click here to request The Motley Fool's premium report on the company, which includes 12 months of ongoing coverage.

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Related Tickers

10/27/2016 4:00 PM
FB $129.69 Down -1.35 -1.03%
Facebook CAPS Rating: ***
ZNGA $2.78 Down -0.04 -1.42%
Zynga CAPS Rating: *