Here's What You Should Know About Zynga Now
U.S. stocks traded in a narrow range today, ending the day essentially unchanged as the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average fell 0.05% and 0.28%, respectively.
Consistent with that small loss, the CBOE Volatility Index (VIX) , Wall Street's "fear index," rose just 0.4% to close at 16.44. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)
Zynga: Don't play this game
The shares of social games developer Zynga are up by nearly a fifth in two days (see graph) on news that founder Mark Pincus is stepping down as CEO to make way for Don Mattrick, who had been the president of Microsoft's Interactive Entertainment Division. Is that "pop" justified?
The more I learn about Mattrick, the more I think this hire is a terrific coup for Zynga. For one thing, one would be hard-pressed to find someone with deeper knowledge and experience of the gaming industry. At 17, Mattrick founded games company Distinctive Software, which he sold to Electronic Arts (EA) by the time he was 27. That's where he went on to spend 15 years of his career. At EA, he built two fabulous franchises, the Sims and FIFA Soccer. His record developing the Xbox franchise during the six years he spent at Microsoft is, by all accounts, excellent.
Furthermore, he is certainly being incentivized in a manner that aligns his interests with (suffering) shareholders: TheWall Street Journal reports that roughly 95% of his compensation will be in stock.
All good things, but it might not be enough. As former EA Kristian Segestrale told the Financial Times: "He's the best Zynga could have done -- it's a very courageous move but both for him and for Zynga it will be incredibly challenging." Even ignoring the challenge of a successful transition to mobile devices, the casual gaming market is extraordinarily volatile. According to online tracker AppData, just yesterday, Zynga lost its crown as the top games provider on Facebook to King.com, a position it had held for five years.
Here's the bottom line: If you believe Zynga's stock was properly valued prior to the announcement, then a 18% "Hattrick premium" seems pretty reasonable. If you believe (as I do) that the enormous challenges and uncertainty facing Zynga's aren't fully reflected in the price, the appointment of a new CEO will do little to get you excited. It's impossible to make any forecast of what Zynga will earn five years from now (one can't even be certain the company will still exist), so any intrinsic value estimate on a cash flow basis is meaningless. Make no mistake about it: Buying shares of Zynga today is no different from playing virtual roulette -- with real money, that is.
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The article Here's What You Should Know About Zynga Now originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned, and neither does The Motley Fool. 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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