Zynga and Groupon Are the Duds of the IPO Class of 2011

Some of the hottest Web-based companies went public three years ago. LinkedIn (LNKD) and Zillow (Z) have gone on to become big winners for early investors. Groupon (GRPN) and Zynga (ZNGA), on the other hand, have gone on to not-so-great things.

Groupon went public in November 2011 at $20. Zynga followed a few weeks later with underwriters pricing its debut at $10. But their early buzz faded quickly, and investors turned sour on the daily deals leader and the mobile game publisher behind "FarmVille" and "Words With Friends." Both stocks have gone on to shed more than two-thirds of their value.

Dumb and Dumber

Zynga reported disappointing quarterly results after Thursday's close. Analysts were holding out for improvement, but Zynga merely broke even, with gross bookings declining 7 percent. The company's gross bookings peaked in 2012, and apparently have still not bottomed out. Daily active users and folks paying to play them continue to fade as Zynga's roster of games just isn't as appetizing as it used to be.

Zynga isn't seeing the light at the end of the tunnel. It now sees $695 million to $725 million in gross bookings for all of 2014, well below the $770 million to $810 million that it was targeting just a few months ago.

The week wasn't really much better for Groupon. The company reported two days earlier, and while it's holding up relatively better, its performance still isn't enough to please the market. Groupon's revenue surged 23 percent to $751.6 million, but that's coming largely from international expansion and a domestic emphasis on selling physical goods. These are moves that weigh on margins, explaining why gross profits were essentially flat with last year's showing despite the top-line advance.

Groupon also hosed down its outlook. It now expects adjusted EBITDA -- or earnings before interest, taxes, depreciation and amortization -- to exceed $270 million. When the year began, the flash sale specialist was hoping to "slightly exceed" the $286.7 million it rang up in 2013.

Both companies did roughly break even in their latest reports. That's significant since Groupon and Zynga are still flush with a lot of the cash they raised when they went public nearly three years ago. Groupon had $868 million in cash and equivalents in its coffers at the end of June. Zynga is holding on to $1.15 billion, and that's a big deal since it translates into a little more than $1.30 a share in cash. Zynga's stock is trading for roughly twice that amount so there's a pretty big cash mattress there.

What If You Had Bought All Four IPOs?

Zynga and Groupon have certainly been disappointments, but it doesn't mean that 2011 was a regrettable year for IPO investors. Those that bought into Zillow and LinkedIn are going pretty well.

Like Groupon, Zillow went public at $20. Unlike Groupon, the fast-growing real estate website operator's been a hot property. It has come through with a nearly 600 percent pop. LinkedIn went public at $45, and shares of the social networking site for career-oriented movers and shakers have more than quadrupled in value.

It all adds up in the end for the ballyhooed class of 2011. An investor that put an equal investment into all four IPOs would be doing pretty well today. Even after seeing Groupon and Zynga lose more than two thirds of their value, $40,000 divided into $10,000 investments of Groupon, Zynga, Zillow, and LinkedIn would be worth $121,817 as of Thursday's market close.

This doesn't take the sting away from the portfolio disasters that Groupon and Zynga have become, but it's an important lesson in diversification and the importance that owning just a single winner or two can more than offset sharp declines elsewhere.

It's definitely a mixed portrait for the class of 2011, but let's give it some more time. Groupon and Zynga sill have two more years to get things right in time for their five-year class reunion.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends LinkedIn and Zillow. The Motley Fool owns shares of LinkedIn and Zillow. Try any Motley Fool newsletter service free for 30 days.