The Facebook IPO is coming! The Facebook IPO is coming! The Facebook IPO is coming!
After relentless speculation and anticipation, the most popular social network site finally filed for its initial public offering (IPO) yesterday.
Sadly, we'll have to endure another couple months of "friending fever" before shares actually begin trading. (The anticipated IPO date is sometime in May.)
While we wait, no doubt investor interest in other social media stocks is going to heat up. But please don't let the hype push my warnings of a few weeks ago into the dark, deep, unreachable recesses of your mind. (WSD‘s Justin Fritz has some choice words on the subject, as well.)
Almost without exception, social media IPOs have proven to be a sucker's bet. To date, none of the hype has translated into any profits for everyday investors. And I don't expect that track record to improve any time soon.
Here's why…
Zynga: Still a Skeptic
Aside from Facebook's IPO filing, the next biggest news in the social media space of late is that social-gaming company, Zynga (Nasdaq: ZNGA), is considering expanding into online gambling.
Some will argue the move is logical. After all, Zynga already runs the country's most popular online poker game, Zynga Poker. So it would just be tapping into its user base to offer another product of interest.
My response: Anybody home? Huh? Think, McFly. Think!
Remember, Zynga was only founded in 2007. By all standards, it's still an infant. And yet management is already looking for new growth opportunities?
Forget being overly reliant on Facebook. Forget operating in a hit-driven industry. Forget about deriving the overwhelming majority of its revenue (96%) from a microscopic minority of its users (3%). Changing focus so early on is the biggest red flag of all for Zynga's stock!
I mean, think about it. Currently Zynga operates a business with first-mover advantages and limited competition. A move into online gambling, however, would carry none of those benefits.
Not to mention, it introduces and exposes the company to a world they know very little about. Namely, regulation.
In the end, Zynga's management is sending a message to investors that growth for its core business is already waning.