Facebook and Groupon Win Back Investors, Spur Rally

Investors are finally warming up to the hyped Internet stocks they were supposed to love last year.

Shares of three of the Web’s top newly minted stocks -- local-reviews site Yelp Inc., online real-estate site Trulia Inc. and social-networking giant Facebook Inc. -- have returned an average 130 percent this year, compared with a 19 percent gain for companies in the Standard & Poor’s 500 Index, amid strong revenue growth and progress in areas like mobile. Even daily-deals company Groupon Inc., which plummeted as low as 87 percent below its 2011 initial public offering price because of management stumbles and competition, is up 79 percent this year.

The gains are set to continue as investors grow more confident in fledgling business models such as mobile and local advertising, said Aaron Kessler, an analyst at Raymond James & Associates. Those areas have propelled sales for Yelp and Facebook, and analysts on average project Groupon will post 7 percent revenue growth when it reports earnings today as it diversifies into mobile and e-commerce offerings, according to estimates compiled by Bloomberg.

“Web 2.0 companies have been performing better than the Web 1.0 companies,” Kessler said. “More companies with social, mobile and local have been doing better recently. These are the growth drivers today.”

Investor Optimism

The optimism contrasts with last year’s turbulence for consumer Internet companies. Groupon, social-games company Zynga Inc. and Facebook, in particular, fomented an investor frenzy upon their IPOs -- only to suffer the consequences when skeptics questioned how their newfangled businesses could sustain growth through virtual goods and daily deals, and without a way to make money from mobile.

Facebook tumbled more than 50 percent below its IPO price in September as investor concern mounted over whether a shift toward usage of its service on mobile devices would hamper its ability to sell advertising. Groupon grappled with management snafus and a slowdown in daily-deals sales, and Zynga plunged more than 75 percent as consumers shifted away from some of its games.

Now several months on, some of the companies are benefiting from pushes into mobile and local advertising. Last week, Facebook closed above its $38 IPO price for the first time since its debut trading day, after it turned development toward mobile software and began charging marketers to show messages in the news feed of users’ wireless devices. The social network had its biggest one-day gain last month after announcing mobile ads accounted for 41 percent of revenue, up from 14 percent a year earlier.

Tucker Bounds, a spokesman for Menlo Park, California-based Facebook, declined to comment.

Sentiment Change

“It was a change in sentiment on Facebook and a change in sentiment on the mobile online-ad opportunity,” said Tom Forte, an analyst at Telsey Advisory Group.

Yelp also surged to a record high earlier this month after its revenue, driven by local advertising, topped analyst expectations. Trulia last month posted sales that also beat estimates, as buyers and sellers of homes increasingly rely on online tools to connect with one another to compare prices.

“Our marketplace and our media businesses both had a strong second quarter,” Pete Flint, Chief Executive Officer of San Francisco-based Trulia, said in an e-mailed statement.

Vince Sollitto, a spokesman for San Francisco-based Yelp, declined to comment.

While Groupon remains below its IPO price of $20, it has seen its shares more than triple to $8.70 at yesterday’s close from a low of $2.60 last November.

Shifting Course

The company has shifted away from daily discounts toward a trove of coupons available to users at any time, helping to spur a rally, Sameet Sinha, an analyst at B. Riley & Co., said in an interview.

“People started doing the math on what, ultimately, this could be worth,” Sinha said. “The numbers are finally starting to go up.”

Groupon is projected to report a second-quarter net loss of 3 cents a share, according to analysts surveyed by Bloomberg. At the same time, analysts estimate sales will grow to $606.1 million, up 7 percent from the same period a year earlier.

Going Mobile

Investors will look for the deal provider’s progress in adding customers on mobile phones, who accounted for 45 percent of North American transactions in the first quarter of this year.

Groupon, which started out promoting discounts via e-mail alerts, is bringing on new customers as more smartphone users turn to its mobile app, according to Ross Sandler, an analyst at Deutsche Bank.

“Groupon is surprisingly the most mobile penetrated e-commerce company we track,” Sandler wrote in a research report in June. He upgraded the shares to buy from hold and raised his target price to $10 from $6.

Co-CEOs Eric Lefkofsky and Ted Leonsis have also helped stabilize the company while they search for a replacement for Andrew Mason, the Groupon co-founder they ousted as CEO in February amid faltering growth.

Bill Roberts, a spokesman for Chicago-based Groupon, declined to comment on the stock.

Some Exceptions

Not all recent Web IPOs have fared as well. Zynga is up 24 percent this year, more than the S&P 500. Yet its stock tumbled 14 percent on July 26, the biggest one-day decline since July 2012, as the company abandoned plans to enter the online-gambling business in the U.S. Zynga recently replaced CEO Mark Pincus with Microsoft Corp.’s Don Mattrick.

Dani Dudeck, a spokeswoman for San Francisco-based Zynga, declined to comment.

And this year, shares of mobile-ad network Millenial Media Inc. are down 28 percent. Tremor Video Inc., another online video firm, has dropped 20 percent since its June 26 debut.

The reversal of fortune for many top Internet stocks nonetheless signals investors believe in the growth of new areas including mobile ads, Sinha said.

“They are exceptionally high-growth companies,” Sinha said. “If you have a great brand name and a strategic advantage in an industry, then you have room for growth.”

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