Two stocks reliant on Facebook’s success

Today, companies do not just use Facebook to raise awareness about their products and to get in touch with current and potentially new clients. Some are even highly dependent on the overall success and growth of Facebook. There are stocks which have built their current business models on the success of Facebook. Here are two that have done just that:

Zynga
Zynga, which went public in the second half of last year, is one of the largest online social gaming companies in the world. The company’s games are mainly distributed through social networking platforms such as Facebook. With Facebook generating roughly 75 percent of Zynga’s revenue, the overall business model is heavily dependent on the development and future success of Facebook. As Facebook has grown, Zynga has benefitted greatly increasing its revenue from 19 million USD in 2008 up to 597 million 2010.

Zynga counts for roughly 12 percent of Facebook’s revenue, where Facebook takes a 30 percent cut of all revenue made through gaming activity provided by Zynga on its platform. As Facebook has significant negotiation power in this relationship, any increase in this revenue share would heavily affect the overall earnings of Zynga. Furthermore, not that it is a measure of dependency but more as a fun-fact, the word “Facebook” was printed 204 times in the company’s S-1 file.

Should Facebook at any point in time lose its momentum, Zynga would see significant revenue reduction unless it were to find another similarly active distribution channel for its content. Today Facebook’s success represents the main threat to its business model. However, as Zynga successfully develops its products for other types of platforms such as mobiles, tablets etc. this more diversified product portfolio should decrease this factor of risk.

First earnings report from Zynga
Last night Zynga reported its earnings for the first time since going public. Despite beating analysts’ estimates with revenue and EPS of 311 million USD and 5 cents respectively (analysts’ expected 302 million USD and 3 cents respectively), the company reported a net loss of 435 million USD. Investors were anticipating good results from Zynga as the shares increased by roughly 7 percent in yesterday’s trading, closing at 14.35. However, the company’s loss sent the stock price down again to 13.35 in after-hours trading. Since Facebook filed its papers for its Initial Public Offering Zynga’s shares have however increased by roughly 35 percent, based on yesterday’s closing price (pre-earnings report release) as shown in chart 1, which clearly shows the close link between the two companies. 

Fusion-Io Inc
Another company that is also tied to Facebook’s success is Fusion-Io, a small technology company that went public last year. The company provides a memory storage platform for various enterprises with a new technology (next-generation ioMemory that interacts with CPU and system memory) which is thought to be more efficient than any other platform currently available in the market.

Despite servicing enterprises in various sectors such as financial services, retail, energy and internet, a large proportion of its revenue comes from one company, namely Facebook. As Facebook caters for 845 million monthly active users within the social network, the speed and reliability of the network it relies on needs to be substantial. Fusion-Io has so far been able to provide the product it needs and in 2011 Facebook accounted for roughly 36 percent of Fusion-Io’s total revenue in 2011.

With the increased scale of Facebook’s operation its demand for more efficient memory storage and speed will increase. Increased demand from Facebook might drive Fusion-Io’s future revenue, with analysts expecting 2014 revenue to come close to 600 million USD.

However, as other tech players seek to enter the market with similar technology the relatively small customer base of Fusion-Io might be endangered. Other large enterprises accounting for a big proportion of Fusion-Io’s revenues include Apple (24 percent), IBM (10 percent) and HP (14 percent).

Fusion-Io’s shares are currently traded close to their IPO price and on average analysts have a “hold” recommendation on the stock.

As we can see Zynga and Fusion-Io are heavily dependent on keeping Facebook as their counterpart and are therefore reliant on the overall success of the social network. This can of course be seen as an alert signal for the two stocks. However with increased technology developments and integration with other large partners, both could live a good life without Facebook. On the other hand, should Facebook continue its massive growth, both Zynga and Fusion-Io will significantly benefit.

Having only mentioned two publicly traded stocks I have probably missed several other companies that have similar close ties to Facebook’s business model. Feel free to point them out in the comments field below.

For more analysis on Facebook and its IPO, please refer to one of these previous themes:

1. Questions you should ask before buying Facebook shares
2. How large can Facebook become?
3. What is Facebook really worth? Not as much as some people think.
4. Hey Facebook! We need more disclosure