Another Social Networking Horror Story

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.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

DocumentId: 2134297, ~/Articles/ArticleHandler.aspx, 7/31/2014 8:51:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement