Zynga and Amazon; Big Moves, but Likely Not Good Ones

Understanding irrational stock moves can be a great learning tool and a way to help better protect you from falling prey to the markets crazy swings.

Jan 30, 2014 at 10:59PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

In the past, I have written about big single-day stock moves and noted that they are great examples of how the stock market is not quite yet truly efficient. I have, in many cases, even called some of those big moves irrational price movements. Today, I'd like to highlight two stock moves that are not only irrational, but also examples of why the market may not be completely efficient yet. I'll also point out why day trading can be a very dangerous game to play. So, let's dig in.

Shares of Zynga (NASDAQ:ZNGA) closed the regular trading day up 4.09%. That move came after the company announced it would be laying off 15% of its employees -- or 314 people -- in an attempt to cut costs. Additionally, Zynga announced that it would be buying gaming developer NaturalMotion for $527 million. The company has made games such as CSR Racing and Clumsy Ninja, and is known for its focus on mobile games as opposed to Zynga's historically focused PC-based titles. With this purchase, management is acknowledging that it needs to focus more on mobile, as the number of casual PC gamers has been declining during the past few years.

Then, in the after-hours session, shares increased by another 17.98% after the company reported earnings. Zynga posted revenue of $176.4 million for the quarter, a decline from $311.16 million during the same time period last year, but higher than the $141.1 million analysts were expecting. On the earnings side, the company lost $0.03 per share, compared to analyst estimates of a $0.04 loss for the same quarter in 2012, when Zynga posted a $0.01 gain. Furthermore, management believes the company will post revenue within a range from $155 million to $165 million for the first quarter of 2014, while analysts have been looking for revenue of $170 million. On the earnings side, analysts have been predicting a loss of $0.02 for the current quarter; but Zynga believes it will post a loss of just $0.01. 

The better-than-expected results and positive forward-looking statements by management have investors really hopeful for the future. The problem is that Zynga's previous business model -- making games for casual PC gamers -- seems to be disappearing in front of the company, and it doesn't appear to have a solid solution for this problem. Furthermore, as we have seen with Zynga and some of its most popular games, users don't last very long -- a few months at best -- and then they move on to the next game. This model of consistently creating new hit after new hit is not easy, and while NaturalMotion has produced a few big winners for mobile, there is no guarantee those hits will keep coming. The reason I mention that is because Zynga is a game developer, so to spend big bucks at a time when it's struggling -- to gamble with buying a company that essentially does the same thing -- doesn't seem to make a lot of sense. The mobile games NaturalMotion has today will likely not be worth a lot in a few months; so if it was the talent Zynga was looking for, why not just make certain employees offers they couldn't refuse?

All in all, the whole move seems irrational, and seems like Zynga is simply putting an expensive Band-Aid on a big bleeding wound.

Next, shares of Amazon.com (NASDAQ:AMZN) rose 4.9% during the regular trading period today. The move was highly unwarranted, as no major news was released this morning or during the regular trading session. That, to me, is a sign that the move was caused by traders hoping to jump in on the stock before a big pop. The company was scheduled to release earnings today, and this was the likely cause for the move higher. In December, Amazon reported that the 2013 holiday shopping season was the best that it ever had, which is likely the kind of information that investors were basing their trading strategies on.

Shortly after the closing bell rang, Amazon reported earnings, and quickly following the release, shares were down as much as 9%. Revenue for the quarter came in at $25.59 billion, and earnings per share hit $0.51. Analysts were looking for revenue of $26.05 billion and earnings of $0.71 per share, after the company posted revenue of $21.27 billion in sales, and $0.21 EPS during the same quarter last year. 

When the after-hours session ended at 8 p.m. EST, shares were only down 4.59%, indicating that it was rather flat for the day. But this was an example of how day traders who panic-sold after the initial results were releasing lost money on the trade, and that it's unlikely anyone who bought shares of the company today made any money. During earnings season, stock prices fluctuate more than normal and, thus, those investors looking to make a quick buck come out in full force. While there isn't anything wrong with buying during earnings season, it's best to hold on individual stocks a few days prior and after they report results -- and always buy to own forever.

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Matt Thalman owns shares of Amazon.com. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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