Beware of These Online Stocks
A lasting competitive advantage is something that every business strives to achieve. But I'm concerned that some of the newest and most exciting entrants to the public market might have fleeting competitive advantages at best.
Pandora (NYS: P) , Yelp (NYS: YELP) , Zynga (NAS: ZNGA) , and Groupon (NAS: GRPN) -- a group soon to include Facebook -- has excited investors with the potential their businesses show. But there are warning signs everywhere that these companies will soon be replaced by something else. MySpace should be our first cautionary tale, but more recently I could point to restructuring happening at Yahoo! (NAS: YHOO) as a yellow flag to all investors.
Here is why I'm worried about the companies above.
Just this morning a friend of mine asked why I wasn't using Spotify or Grooveshark instead of Pandora. Apparently I'm behind the times!
It's this kind of fleeting interest in apps and websites that makes companies like Pandora so vulnerable. There is absolutely nothing to keep me loyal as a listener, and if a new business model comes up that works better, I'm gone.
Yelp looks like the next Yahoo! to me. The site is cluttered, and while there's a ton of information, it isn't easy to use. Revenue grew 74% last year, but in the online space it's profits that matter and that's where Yelp fails. Like Yahoo!, Yelp will struggle to turn advertising revenue into profits and just doesn't look like a good bet to me. I can find reviews for restaurants at an multitude of other sites locally.
I'm still not sure how a company promoting loss leaders is worth $9.7 billion? Groupon has managed to spread to all kinds of nooks and crannies of discount products, but until I see a solid profit I'm not buying into this story. There are too many competitors to fight off, and if Groupon were profitable there would be even more competition biting at its heels. This discount just isn't for me.
My biggest problem with Zynga is that it doesn't sell anything tangible or really useful. It sells virtual stuff on virtual games. There is absolutely nothing tying customers to these games and I'm driven away by how Zynga ties you to Facebook and makes you share information.
What makes me question Zynga's competitive position the most is how quickly users can move from game to game. I've run through dozens of iPhone games, with no loyalty to what company makes them. Switching costs are low for customers and if Zynga doesn't keep its games innovative, the stock will tumble.
Beware of the sexy IPO
Some of these companies have had extremely hot IPOs, only to see their stocks fall back to earth. Soon they'll have to start showing profits like the rest of the market, and that's when their competitive disadvantages will start to show. Beware of buying stock in companies that can be replaced in the blink of an eye.
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At the time this article was published Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdings, or follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Yahoo.Motley Fool newsletter serviceshave recommended buying shares of Yahoo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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