July 26, 2012

No longer priced to perfection

The last few months the stock market has been tough on several of the recently public Internet companies like Groupon and Zynga. The main issue for all of them were that they were priced to perfection. When there were issues, the stocks got hammered.

But as they both raised fair amounts of cash and had good underlying businesses, they're no longer priced to perfection. Wise women and men can disagree on their long-term prospects and the current valuation, but they're now looking fairly reasonable.

Groupon trades at roughly 2x sales (trailing twelve months) and was showing improved margins and operating metrics in Q1. I think Groupon will have 10-20 % net margins long-term, which gives reasonable price/earning ratios between 10-20 with the current $4.6 billion valuation. With 12 month trailing free cash flow of $310 million in Q1, the assumption doesn't seem completely unreasonable.

Zynga traded at $3.20 per share after its Q2 report yesterday (down 37 % from its closing price), which indicates a market capitalization of $2.4 billion. That is also about 2x sales. At the same time Zynga has https://twitter.com/nikiscevak/status/228247564183547905">$1.6 billion in cash, will likely have cash-flow of $100-200 million this year and owns is headquarters (valued at ca $250 million). If one backs out the cash at hand and looks at cash-flow or EBITDA to enterprise value, Zynga isn't extremely expensive.


Teymour Farman-Farmaian said...

I think it is too easy to lump Zynga and Groupon together. They are very different businesses with very different risks.

I agree that both companies seem to be very reasonably priced. However, the core business-model stability of both businesses are in very different classes.

Zynga has a proven business (middle aged ladies paying to decorate with friends, online, etc.). The risk with Z is its dependence on FB...but it looks as if FB is going to do everything to improve Z's prospects as FB needs to make more money.

Groupon's fine print, however, shows a business with huge churn of both businesses and buyers, with increasingly expensive marketing costs, begging the question whether it has figured out its business at all.

ville said...

What do you make of FB now that it's almost 50% down? http://www.google.com/finance?q=NASDAQ:FB