zynga by sornette

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A post-mortem analysis on the prediction of Zyngasprice movements

Zalan Forro, Peter Cauwels, and Didier Sornette

Department of Management, Technology and Economics, ETH Zurich

June 1, 2012

[email protected], +41 44 632 09 [email protected], +41 44 632 27 [email protected], +41 44 632 89 17

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1 ZYNGAS VALUATION AND PRICE HISTORY

1 Zyngas 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) [1]. Since no solid justification wasgiven for this valuation at the time, we decided to develop a methodology to compute Zyngas

intrinsic value. On December 27th, 2011, extending the methodology proposed by Cauwels

and 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 optimistic

assumptions, Zynga was only worth 4.2 billion USD (or 6 USD/share). In a nutshell, here

is a summary of Zyngas 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) [4]. It indicated

that Zynga was responsible for 12% of Facebooks revenues. This led to a substantial price

increase of Zyngas 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 [5]. The next day Zyngas 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) [6]. 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 [10]. Conscious of the

fact, that our valuation had only a predictive power on the long term (Zyngas 12 USD/sharewas still far from our 4.8 USD/share valuation), we developed an argument to make a short

time prediction of Zyngas price movements. On April 19th, 2012, we published on arXiv [6]

a trading strategy to take advantage of Zyngas price movements towards the end of April,2012.

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2 POST-MORTEM ANALYSIS OF THE PROPOSED STRATEGY

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 Zyngas bubble.2012-02-14 14.35 Zynga unveils its financial results for the 4th quarter of2011. The next day, Zyngas 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 Zyngas price history until April 18 th, 2012, the date of ourprediction.

15Dec11 09Jan12 01Feb 14Feb 01Mar 21 & 27Mar 18Apr12

4.8

5.7

6.8

8.0

10.0

12.0

14.7

16.0

Time

Sharevalue[$]

IPO

Startoftherise

FacebookS1Filing

Financialstatement4Q11

Announcementofzynga.com

AcquisitionofOMGPOP

Secondaryoffering

Date

ofprediction

3.4

4.0

4.8

5.6

7.0

8.4

10.3

11.2

Marketcapitalizationinbillions

Daily closeBase case scenarioHigh case scenario

Extreme case scenario

Figure 1: Zyngas share price history until our prediction on April 18th, 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 with

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the date stamp of April 19th, 2012 [6]. 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, Zyngas 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, nottaking 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 signifi-

cantly 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, Zyngarevealed 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 com-

pany 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 Facebooks IPO on May 18th. Indeed, it was soonclear from the price dynamics after the Facebooks IPO that it was not a bigsuccess. On the other hand, due to the use of the over-allotment or greenshoe 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

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since it went public, Zyngas 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 tellus if this price dynamic will stabilize close to our fundamental value calculationor 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%.

19Apr 18May

5.7

6.8

7.37

8.348.52

9.0

9.42

10.0

10.5

Financialstatement1Q12

Endoflockup

FacebookIPO

Time

Sharevalue[$]

4.0

4.8

5.2

5.86.0

6.3

6.6

7.0

7.4

Marketcapitalizationinbillions

Share price

Extreme case scenario

High growth scenario

Pot gains on 27/04Pot gains 27/0430/04

Pot gains 27/0431/05

27 & 30Apr 31May

Figure 2: Price dynamics of Zynga from the publication of our trading strategy on April19th, 2012 on the arXiv until May 31st, 2012. Potential gains (indicated as Pot gains in theinset) that could be obtained by opening a short position on April 27 th are indicated by theshaded area. The data has a 10 minutes time resolution. (Source of the data: Bloomberg).

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REFERENCES REFERENCES

References

[1] S1/A Form of the Filings to the SEC of Zynga, 2011. http://goo.gl/0TYmR.

[2] P. Cauwels and D. Sornette. Quis Pendit Ipsa Pretia: Facebook Valuation and Diagnos-tic of a Bubble Based on Nonlinear Demographic Dynamics. The Journal of Portfolio

Management, 38(2):5666, 2012.

[3] Z. Forro, P. Cauwels, and D. Sornette. Valuation of Zynga. 2011. http://arxiv.org/

abs/1112.6024.

[4] S1 Form of the Filings to the SEC of Facebook, 2012. http://goo.gl/uGfbv.

[5] 8-K Forms of the Filings to the SEC of Zynga, 2012. http://goo.gl/neY30.

[6] Z. Forro, P. Cauwels, and D. Sornette. When games meet reality: is Zynga overvalued.2012. http://arxiv.org/abs/1204.0350.

[7] 2012 Rittmeyer, F. http://www.schweizermonat.ch/artikel/faellt-der-kurs-von-zynga.

[8] 2012 Garessus E. http://www.er.ethz.ch/interviews/Sornette_Zynga_TEMPS.pdf.

[9] 2012 Techology Review. http://www.technologyreview.com/blog/arxiv/27704/.

[10] S1/A Form of the Filings to the SEC of Zynga, 2012. http://goo.gl/h3aZK.

[11] Takahashi, D, 2012. http://venturebeat.com/2012/03/01/

zynga-launches-zynga-com-as-it-expands-beyond-facebook-in-a-big-way/ .

[12] Cutler, K-M, 2012. http://techcrunch.com/2012/03/21/

zynga-omgpop-porter-sabet-david-ko/.

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