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Zynga by Sornette

Zynga by Sornette

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Published by: wlannes on Sep 16, 2013
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A post-mortem analysis on the prediction of Zynga’sprice movements
Zal´an Forr´o
, Peter Cauwels
, and Didier Sornette
Department of Management, Technology and Economics, ETH Z¨urichJune 1, 2012
zforro@ethz.ch, +41 44 632 09 28
pcauwels@ethz.ch, +41 44 632 27 43
dsornette@ethz.ch, +41 44 632 89 17
1 Zynga’s valuation and price history
Zynga, the well-known social-networking company making games on Facebook, went IPO onDecember 15
, 2011, for 7 billion USD (or 10 USD/share) [1]. Since no solid justification wasgiven for this valuation at the time, we decided to develop a methodology to compute Zynga’sintrinsic value. On December 27
, 2011, extending the methodology proposed by Cauwelsand Sornette[2] to compute the value of Facebook, we published an article on the arXiv[3] concluding to an overvaluation of Zynga. Indeed, we found that even using optimisticassumptions, Zynga was only worth 4.2 billion USD (or 6 USD/share). In a nutshell, hereis a summary of Zynga’s price trajectory until April 18
(more details are given in table
and figure 1). On February 1
, 2012, Facebook released its S-1 filing (a filing containingfinancial informations that companies must submit before going public) [4]. It indicatedthat Zynga was responsible for 12% of Facebook’s revenues. This led to a substantial priceincrease of Zynga’s shares, closing at a peak of 14.35 USD/share (10 billion USD valuation)on February 14
, 2012. The same day, after the market closed, Zynga released its financialresults for the 4
quarter of 2011 [5]. The next day Zynga’s shares experienced their biggestdrop since the IPO. Integrating this new financial information into our model, we updatedour valuation to 3.4 billion USD (or 4.8 USD/share) [6]. This suggested that Zynga was stillin a bubble, information relayed by Schweitzer Monat and Le Temps newspapers as well asby the Technology Review published by MIT [7, 8, 9]. On March 28
, insiders of Zynga(including Mark Pincus its CEO) sold 43 million shares in a secondary offering (before thelock-up period). They were sold over the counter for 12 USD/share [10]. Conscious of thefact, that our valuation had only a predictive power on the long term (Zynga’s 12 USD/sharewas still far from our 4.8 USD/share valuation), we developed an argument to make a shorttime prediction of Zynga’s price movements. On April 19
, 2012, we published on arXiv [6]a trading strategy to take advantage of Zynga’s price movements towards the end of April,2012.2
Date Share price [$] Event2011-12-15 10.00 Zynga goes through its IPO.2012-01-09 8.00 Zynga closes at its lowest level for the next 4 months.2012-02-01 10.60 Facebook publishes its S1 Filing. This fuels Zynga’s bubble.2012-02-14 14.35 Zynga unveils its nancial results for the 4
quarter of 2011. The next day, Zynga’s share price experiences an18% drop, its biggest drop until today.2012-03-01 14.48 Zynga announces that it will launch zynga.com [11], anindependent platform from Facebook. The news is followedby a small increase in share price.2012-03-21 13.72 Zynga acquires OMGPOP, another social gaming company,for over 200 million $ [12].2012-03-27 13.01 Inside investors of Zynga (including its CEO, Mark Pincus)sell 43 million shares at 12$/piece in a secondary offering.This is followed by a significant 6% drop in share price.2012-04-18 10.04 We publish our short-term prediction on the arXiv.Table 1: Important events in Zynga’s price history until April 18
, 2012, the date of ourprediction.
15Dec1109Jan1201Feb14Feb01Mar 21 & 27Mar18Apr124.
   S   h  a  r  e  v  a   l  u  e   [   $   ]
   I   P   O   S   t  a  r   t  o   f   t   h  e  r   i  s  e   F  a  c  e   b  o  o   k   S   1   F   i   l   i  n  g   F   i  n  a  n  c   i  a   l  s   t  a   t  e  m  e  n   t   4   Q   1   1   A  n  n  o  u  n  c  e  m  e  n   t  o   f  z  y  n  g  a .  c  o  m   A  c  q  u   i  s   i   t   i  o  n  o   f   O   M   G   P   O   P   S  e  c  o  n   d  a  r  y  o   f   f  e  r   i  n  g   D  a   t  e  o   f  p  r  e   d   i  c   t   i  o  n
   M  a  r   k  e   t  c  a  p   i   t  a   l   i  z  a   t   i  o  n   i  n   b   i   l   l   i  o  n  s
Daily closeBase case scenarioHigh case scenarioExtreme case scenario
Figure 1: Zynga’s share price history until our prediction on April 18
, 2012. Source of thedata: Yahoo Finance.
2 Post-mortem analysis of the proposed strategy
In this section, we will evaluate our ex-ante prediction in the light of the most recent events.The version of the paper with our ex-ante proposed strategy can be found on the arXiv with3

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