Last week we saw notable gains for a number of Web 2.0 companies, as they reported better-than-expected quarterly figures that impressed the market. The new-found love for these businesses may have you wondering: Has the market been unduly bearish up to this point, and do these companies actually have the potential to be a lucrative investment?
Let's take a look
One of the businesses that had investors turning their heads last week was online gaming company Zynga (ZNGA +0.00%). Shares popped more than 13% as investors digested quite a bit of positive news. Not only did quarterly revenues exceed expectations, but CEO Mark Pincus also announced a $200 million share-buyback program, and the company reached a deal with gambling company bwin.party to offer real-money gaming in the U.K.
All of this is great news, to be sure, but the fact of the matter remains: Zynga is still losing money. The company has been largely dependent on Facebook (FB 2.33%) for business in the past, and until Zynga can prove it's able to stand on its own -- and turn a profit -- ts stock indeed appears to be more of a gamble than an investment.
Another Web-based company that saw big gains last week was the consumer-review site Angie's List (ANGI +0.00%), whose shares ran up 25% on an earnings beat. Again, though, we find another young company that's not yet profitable. To be fair, the quarterly numbers were impressive -- and the nearly 70% growth in paid memberships is nothing to balk at. After all, that's a massive part of its business. But until Angie can get her costs under control and start actually, you know, making money, I'm not too enthusiastic about her stock.
Then there was the review website Yelp (YELP +0.97%), which saw its shares jump 15% on quarterly results and the announcement of an acquisition. Investors were excited to hear that Yelp picked up Qype, the largest local review company in Europe, in a $50 million deal.
Alas, I remain a little hesitant about the Yelp's prospects. The fact of the matter is, Google (GOOG 0.93%) can eat this company alive, and that's not an entirely unreasonable scenario. The two companies don't play well together, and Yelp has not been shy about making that known, complaining about Google's placement of its own local reviews higher in search results than Yelp's. Whether or not Yelp has a legitimate case, I don't see the company faring well by going toe-to-toe with one of the most powerful tech companies around.
In the end, Yelp may suffer a similar fate to Pandora (P +0.00%), which, aside from facing fundamental structural disadvantages because of higher content acquisition costs than its satellite and cable competitors, fell as much as 10% on the news that Apple (AAPL +0.80%) was entering the music-streaming business. Oh, then there's also the fact that Yelp still doesn't make any money.
The takeaway
At the end of the day, these companies all share one ominous trait: They are not profitable. Not a one. This is understandably problematic from an investment standpoint. So while Zynga, Angie's List, and Yelp all showed the market they were a little better than people thought, the longer-term prospects for the three are uncertain at best. With so many stocks out there to choose from, it's tough to argue that these yet-to-be-profitable web businesses are the best choice.
