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Zal´ an Forr´ o∗ , Peter Cauwels† , and Didier Sornette‡ Department of Management, Technology and Economics, ETH Z¨ urich June 1, 2012
email@example.com, +41 44 632 09 28 firstname.lastname@example.org, +41 44 632 27 43 ‡ email@example.com, +41 44 632 89 17
1 ZYNGA’S VALUATION AND PRICE HISTORY
Zynga’s valuation and price history
Zynga, the well-known social-networking company making games on Facebook, went IPO on December 15th , 2011, for 7 billion USD (or 10 USD/share) . Since no solid justiﬁcation was given for this valuation at the time, we decided to develop a methodology to compute Zynga’s intrinsic value. On December 27th , 2011, extending the methodology proposed by Cauwels and Sornette to compute the value of Facebook, we published an article on the arXiv  concluding to an overvaluation of Zynga. Indeed, we found that even using optimistic assumptions, Zynga was only worth 4.2 billion USD (or 6 USD/share). In a nutshell, here is a summary of Zynga’s price trajectory until April 18th (more details are given in table ?? and ﬁgure 1). On February 1st , 2012, Facebook released its S-1 ﬁling (a ﬁling containing ﬁnancial informations that companies must submit before going public) . It indicated that Zynga was responsible for 12% of Facebook’s revenues. This led to a substantial price increase of Zynga’s shares, closing at a peak of 14.35 USD/share (10 billion USD valuation) on February 14th , 2012. The same day, after the market closed, Zynga released its ﬁnancial results for the 4th quarter of 2011 . The next day Zynga’s shares experienced their biggest drop since the IPO. Integrating this new ﬁnancial information into our model, we updated our valuation to 3.4 billion USD (or 4.8 USD/share) . This suggested that Zynga was still in a bubble, information relayed by Schweitzer Monat and Le Temps newspapers as well as by the Technology Review published by MIT [7, 8, 9]. On March 28th , insiders of Zynga (including Mark Pincus its CEO) sold 43 million shares in a secondary oﬀering (before the lock-up period). They were sold over the counter for 12 USD/share . Conscious of the fact, that our valuation had only a predictive power on the long term (Zynga’s 12 USD/share was still far from our 4.8 USD/share valuation), we developed an argument to make a short time prediction of Zynga’s price movements. On April 19th , 2012, we published on arXiv  a trading strategy to take advantage of Zynga’s price movements towards the end of April, 2012.
2 POST-MORTEM ANALYSIS OF THE PROPOSED STRATEGY Date Share price [$] 2011-12-15 10.00 2012-01-09 8.00 2012-02-01 10.60 2012-02-14 14.35 2012-03-01 2012-03-21 2012-03-27 14.48 13.72 13.01 Event Zynga goes through its IPO. Zynga closes at its lowest level for the next 4 months. Facebook publishes its S1 Filing. This fuels Zynga’s bubble. Zynga unveils its ﬁnancial results for the 4th quarter of 2011. The next day, Zynga’s share price experiences an 18% drop, its biggest drop until today. Zynga announces that it will launch zynga.com , an independent platform from Facebook. The news is followed by a small increase in share price. Zynga acquires OMGPOP, another social gaming company, for over 200 million $ . Inside investors of Zynga (including its CEO, Mark Pincus) sell 43 million shares at 12$/piece in a secondary oﬀering. This is followed by a signiﬁcant 6% drop in share price. We publish our short-term prediction on the arXiv.
Table 1: Important events in Zynga’s price history until April 18th , 2012, the date of our prediction.
16.0 14.7 11.2
Date of prediction Secondary offering
Facebook S1 Filing
Daily close Base case scenario High case scenario Extreme case scenario
Financial statement 4Q11
Acquisition of OMGPOP
Announcement of zynga.com
8.0 6.8 5.7 4.8 15−Dec−11 09−Jan−12 01−Feb
5.6 4.8 4.0 3.4
21 & 27−Mar
Figure 1: Zynga’s share price history until our prediction on April 18th , 2012. Source of the data: Yahoo Finance.
Post-mortem analysis of the proposed strategy
In this section, we will evaluate our ex-ante prediction in the light of the most recent events. The version of the paper with our ex-ante proposed strategy can be found on the arXiv with 3
Market capitalization in billions
Share value [$]
Start of the rise
2 POST-MORTEM ANALYSIS OF THE PROPOSED STRATEGY the date stamp of April 19th , 2012 . Figure 2 summarizes the price movements of Zynga from April 19th till May 31st , 2012. The strategy was based on 3 legs: 1. From the time of writing (April 16th , 2012) to the announcement of the ﬁnancial results (around April 26th , 2012): stay out of Zynga or hedge if invested. Between April 19th and April 26th , Zynga’s share price dropped from 10.2 to 8.2 USD and then rebounced to 9.42 USD (the opening price on April 27th ). Although the stock went down 7.7% in a week, its behavior was very volatile. As we did not have any strong factual information to support a clear trading strategy before April 27th , not taking a position appears to have been an acceptable advice. 2. From the day after the earnings announcement (around April 27th , 2012) to the end of the ﬁrst lock-up period (around April 30th , 2012): if the ﬁnancial results are signiﬁcantly above those of the previous quarter, buy Zynga for a short term holding period. Otherwise short it. This part was undeniably a success. On April 26th , after the markets closed, Zynga revealed its ﬁnancial results for the ﬁrst quarter of 2012. Its quarterly revenues were weak, since they only grew 3.1% since the previous quarter, conﬁrming that the company is in its saturation phase. As a result, on April 27th , Zynga experienced a drop of 9.6%, one of its largest daily drops since its IPO. 3. From the end of the ﬁrst lock-up period (after April 30th , 2012): close all open long positions and short. Monitor the subsequent quarterly releases and the successive ends of future lock- up periods to position a strategy in the same spirit as above. As this last part covers a large time-period (from April 30th to May 31st , 2012), we divide it into a short-term part (the ﬁrst day) and a longer-term part (until the time of writing of this report, May 31st , 2012). • On the ﬁrst day (April 30th ), the prediction was proven successful. Indeed, as a result of the end of the lock-up period, the stock further dropped 2.1% in a single day. Had someone opened a short position on April 27th (at the opening of the markets) and closed it on April 30th (at the closing of the markets), he would have beneﬁted of a 11.5% drop over 2 trading days. • On the longer term, the price trajectory, although quite volatile, went signiﬁcantly down. This was accentuated by Facebook’s IPO on May 18th . Indeed, it was soon clear from the price dynamics after the Facebook’s IPO that it was not a big success. On the other hand, due to the use of the “over-allotment” or “green shoe” option, the price would be kept artiﬁcially above the IPO price for a time. Therefore, investors targeted other social networks like Zynga which lost 13%, Linkedin which lost 6%, Groupon which lost 7% or Renren, the Chinese Facebook which lost 21%. The lack of rebound of Zynga (until today) may be due to the loss of its status as a “proxy” for Facebook. It is worth noting that, for the ﬁrst time 4
2 POST-MORTEM ANALYSIS OF THE PROPOSED STRATEGY since it went public, Zynga’s value entered our fundamental valuation bracket, when on May 21st it dropped to 6.5 USD/share (intraday), below our extreme case scenario of 6.8 USD/share... It even got very close to our high growth scenario of 5.7 USD/share when it reached 5.81 USD/share on May 30th . The future will tell us if this price dynamic will stabilize close to our fundamental value calculation or if the investors’ realistic perception of Zynga is only temporary. To sum up, we have successfully predicted the downward trend of Zynga. Since April 27th , 2012, Zynga dropped 34%.
10.5 10.0 9.42 9.0 Share value [$] 8.52 8.34 Financial statement 1Q12 7.4 7.0 Market capitalization in billions 6.6 6.3 6.0 5.8
Share price Extreme case scenario High growth scenario Pot gains on 27/04 Pot gains 27/04−30/04 Pot gains 27/04−31/05 End of lock−up
5.2 Facebook IPO 4.8
5.7 19−Apr 27 & 30−Apr Time 18−May
Figure 2: Price dynamics of Zynga from the publication of our trading strategy on April 19th , 2012 on the arXiv until May 31st , 2012. Potential gains (indicated as “Pot gains” in the inset) that could be obtained by opening a short position on April 27th are indicated by the shaded area. The data has a 10 minutes time resolution. (Source of the data: Bloomberg).
 S1/A Form of the Filings to the SEC of Zynga, 2011. http://goo.gl/0TYmR.  P. Cauwels and D. Sornette. Quis Pendit Ipsa Pretia: Facebook Valuation and Diagnostic of a Bubble Based on Nonlinear Demographic Dynamics. The Journal of Portfolio Management, 38(2):56–66, 2012.  Z. Forr´ o, P. Cauwels, and D. Sornette. Valuation of Zynga. 2011. http://arxiv.org/ abs/1112.6024.  S1 Form of the Filings to the SEC of Facebook, 2012. http://goo.gl/uGfbv.  8-K Forms of the Filings to the SEC of Zynga, 2012. http://goo.gl/neY30.  Z. Forr´ o, P. Cauwels, and D. Sornette. When games meet reality: is Zynga overvalued. 2012. http://arxiv.org/abs/1204.0350.  2012 Rittmeyer, F. faellt-der-kurs-von-zynga. http://www.schweizermonat.ch/artikel/
 2012 Garessus E. http://www.er.ethz.ch/interviews/Sornette_Zynga_TEMPS.pdf.  2012 Techology Review. http://www.technologyreview.com/blog/arxiv/27704/.  S1/A Form of the Filings to the SEC of Zynga, 2012. http://goo.gl/h3aZK.  Takahashi, D, 2012. http://venturebeat.com/2012/03/01/ zynga-launches-zynga-com-as-it-expands-beyond-facebook-in-a-big-way/.  Cutler, K-M, 2012. zynga-omgpop-porter-sabet-david-ko/. http://techcrunch.com/2012/03/21/
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