Zynga's 10% Pop: A Triumph of Hope Over Reason

U.S. stocks started the second half of the year off on a positive note, as the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average gained 0.5% and 0.4%, respectively.

Investors may have been buoyed by two positive data points this morning. The Institute for Supply Management reported that the manufacturing sector expanded last month, following a month of contraction. In addition, the Commerce Department said that construction spending was close to a four-year high in May.

Those data should provide some succor to investors who fear that the Fed's plan to begin reducing its monthly bond purchases ("quantitative easing") later this year is premature. Of course, a much more visible gauge of the economy's strength is scheduled for later this week: Friday's June employment report.

Consistent with the day's stock price gains, the CBOE Volatility Index (VIX) , Wall Street's "fear index," fell 2.9% -- the fifth consecutive day during which it has fallen or remained unchanged. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Zynga harvests a new CEO
Out with the old, in with the new! Social game developer Zynga is demoting its CEO, the colorful Marc Pincus, who becomes chief product officer (as an aside, there are simply too many "chiefs" at U.S. companies!). Pincus will remain chairman of the board. As a replacement, Zynga is bringing on Don Mattrick, who was president of Microsoft's Interactive Entertainment Business, where he was responsible for the Xbox franchise.

This leadership reshuffle is reminiscent of Andrew Mason's departure from the top of another product of the social networking bubble, Groupon , although the latter lacked the foresight to simultaneously bring in a high-quality replacement. As the following chart, both companies have inflicted similar carnage on their investors, starting on Zynga's first day of trading, Dec. 16, 2011:

ZNGA Chart
ZNGA Chart

ZNGA data by YCharts.

I don't doubt that Mattrick is a talented and experienced executive -- in many ways, he's an ideal hire for the role. However, I question whether he can reverse the tide for Zynga, faced, as he is, with a business that looks largely ephemeral. I'm certain there is a durable market of some size for social networking games. The trouble is, it's difficult to say what size that is and whether it can support Zynga's current valuation (we already know it can't support the valuation the company achieved early on in its life as a public company.)

Today's news is favorable for Zynga, but investors who bid the shares up 10% are making a long-shot bet and the stock isn't anywhere near cheap enough to justify that.

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The article Zynga's 10% Pop: A Triumph of Hope Over Reason originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA and The Motley Fool have no position in any stocks mentioned. You can follow Alex on LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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