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 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) 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) (VOLATILITYINDICES: ^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 (NASDAQ: ZNGA  ) 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 (NASDAQ: GRPN  ) , 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 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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  • Report this Comment On July 01, 2013, at 7:39 PM, hilsonvalli wrote:

    So the new guy will be rearranging the deck chairs on the Titanic?

    Dumb buyers of the stock at this level. This is the same guy who just got pushed out of MSFT for the XBox One debacle.

  • Report this Comment On July 01, 2013, at 8:20 PM, HughMHefner wrote:

    Really? You think it's an idle thing that he left Microsoft as head of the XBox to come to Zynga? Remember Apple Computer in 1999 when Steve Jobs came back on board... bankruptcy to world domination as the largest corp on the planet. Yeah... what do CEO's matter? LOL

    Zynga has a contract with Facebook... the most popular social site on the net. More popular than even Motley Fool, whose random opinions I find interesting to follow on and off... just for chatroom level stimulation. Anyone with an eye to the future can see internet downloaded everything is the way of the world... music, videos, and yes... games. Why trudge to Best Buy or Walmart for games... when you can get them online immediately. Think the head of XBox does not have a slew of gaming ideas and a real handle on the "cloud"? Think again. Hmmm. A three billion dollar company with a turn around genius who took Microsoft from Loser to King in seven years. I thinks perhaps Mr. Mattrick has spied something and some future that he likes. It's hard to tell the difference between a genius and a nut... ask Steve Jobs... ask Elon Musk.

    Do CEO's make a difference? Ask Michael Eisner and Disney... ask Henry Ford. Ask Thomas Edison and General Electric. Ask Sam Walton and Walmart. Can one man make a difference? Are you kidding me?

  • Report this Comment On July 02, 2013, at 12:25 AM, Texasrecurve wrote:

    Great points Hugh. The reports are that 95% of his salary will be in stock. That should tell anyone that he does not plan on this company staying in the 3's!

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