Zynga shares plummet as Facebook game craze wanes

I stepped in and bought some shares at $5.00.<p>ZNGA's current market cap is $3.5B. But it has about $1.2B in cash, and little debt. Regardless of how you feel the games, they do have a real business, so if Instagram is worth $1B to Facebook, ZNGA must be worth somewhere north of $2.5B, its current enterprise value.

One thing I've always wondered with these headlines: how do they establish causality? Do they ask some pundit why shares dropped 10% in a day and run with that?

Zynga is said to be moving games into the mobile market, but you also have to figure that being a gaming company is hard. You're top-rated game <i>will</i> be supplanted by something else in short order and you have to constantly be updating.<p>I think that the way Zynga acquired its customers/users is exacerbating the situation. If your friends are all there you feel compelled to join too, but if some leave it's socially acceptable to follow them elsewhere.<p>Since we're talking about "social" gaming, I also have to wonder whether part of the drop isn't seasonal ... at least where I live, it's now nice enough to spend a lot of time outside socializing (picnics, frisbee, t-ball, etc) so perhaps there's just not the boredom to drive as much traffic?

Please do not be a contrarian who buys ZNGA. You will probably lose money.<p>They have 3,000 employees,[1] even though their business model revolves largely around cloning[a] games that are simple enough for <i>very</i> small teams to create.[2] They're losing money; their EPS is -1.30.[3][4] Just because they have cash from investors doesn't mean that the business model will make significant money in the long run and it's made more complicated by the fact that they have a <i>very</i> heavy dependence on Facebook.[5]<p>They're also dependent on casual gamers (who don't have much loyalty or will to pay) and current trends.[b] Apparently, only 2% of their customers pay for their games.[5] Their stock market valuation seems largely mapped to their active user count[6] (and also Facebook's share prices[5]) rather than their financials.[c] In fact, I can't even say that they're overvalued because that involves looking at the P/E and with a negative EPS, I can't really do an apples-to-apples P/E comparison of Zynga against companies that are actually listed as profitable. Is a -3.8 P/E overvalued?[4] It certainly is risky!<p>-----<p>[a] They also buy some companies behind popular games too, like OMGPOP. This isn't necessarily a good idea.[7]<p>[b] The use of the term "game craze" in the title of the parent article implies that part of the reason ZNGA has a valuation in the billions is because of the current trendiness of Facebook games. The problem with relying on trendiness for investments is that when there's something even trendier (i.e. mobile apps), all the investor money that chases trendy stuff could simply go there instead.<p>[c] It was a popular dot-com bubble plan to focus on market share with a free product at a sustained financial loss.[8] Of course, it's too early to tell if ZNGA will sustain its losses in the long run because its stock is too young. Still, it's <i>very</i> risky.<p>-----<p>[1] <a href="https://en.wikipedia.org/wiki/Zynga" rel="nofollow">https://en.wikipedia.org/wiki/Zynga</a><p>[2] <a href="https://s3.amazonaws.com/nbpromo/dearzynga.jpg" rel="nofollow">https://s3.amazonaws.com/nbpromo/dearzynga.jpg</a><p>[3] <a href="http://www.google.com/finance?q=NASDAQ:ZNGA" rel="nofollow">http://www.google.com/finance?q=NASDAQ:ZNGA</a><p>[4] <a href="http://data.cnbc.com/quotes/ZNGA" rel="nofollow">http://data.cnbc.com/quotes/ZNGA</a><p>[5] <a href="http://beta.fool.com/buffettbeater/2012/06/11/dont-get-zynged-zynga/5571/" rel="nofollow">http://beta.fool.com/buffettbeater/2012/06/11/dont-get-zynge...</a><p>[6] <a href="http://www.marketwatch.com/story/zynga-falls-on-ugly-facebook-trend-2012-06-12" rel="nofollow">http://www.marketwatch.com/story/zynga-falls-on-ugly-faceboo...</a><p>[7] <a href="http://www.forbes.com/sites/insertcoin/2012/05/04/draw-something-loses-5m-users-a-month-after-zynga-purchase/" rel="nofollow">http://www.forbes.com/sites/insertcoin/2012/05/04/draw-somet...</a><p>[8] <a href="https://en.wikipedia.org/wiki/Dot-com_bubble#Bubble_growth" rel="nofollow">https://en.wikipedia.org/wiki/Dot-com_bubble#Bubble_growth</a>

In other news, it's summertime in the US and school just let out. People are using their casual time differently at this time of year.

Rumor has it that the insider lock-up is tomorrow, which doesn't help as it's being discounted.<p><a href="http://www.nasdaq.com/markets/ipos/company/zynga-inc-782377-67565" rel="nofollow">http://www.nasdaq.com/markets/ipos/company/zynga-inc-782377-...</a>

The performance of all these stocks would seem to be a huge argument against the idea that we're in a bubble, a favorite topic around these parts. Bubbles don't look like this.

The lack of inspiration, willingness or innovation on Zynga's part is still baffling.

My reaction to this:<p>Good.

Can we have Brian Reynolds back now, please?<p><a href="http://en.wikipedia.org/wiki/Brian_Reynolds_(game_designer)" rel="nofollow">http://en.wikipedia.org/wiki/Brian_Reynolds_(game_designer)</a>

<a href="http://www.wolframalpha.com/input/?i=znga+vs+fb" rel="nofollow">http://www.wolframalpha.com/input/?i=znga+vs+fb</a><p>Some nice charts...

Any inclination to play Draw Something was removed when it started asking me for extra Facebook permissions.

So major FB source of revenue is collapsing, but FB shares go up? Too much coke on Wall St.