MorningWord 7/2/13: $ZNGA – Game of Thrones

by Dan July 2, 2013 9:28 am • Commentary

MorningWord 7/2/13:  As a fairly new entrepreneur, I hope I never have to do what ZNGA Founder & CEO did just yesterday, fire himself.  Yesterday ZNGA announced the hire of Don Mattrick for the CEO role, MSFT’s former head of XBOX since 2007, and spent his prior 15 years at Electronic Arts on the software side of the business.  ZNGA’s stock has been “banging along the bottom” so to speak over the last couple months as there has been very little constructive fundamental news of late, highlighted by the company’s loss of top spot for all time Facebook game downloads which was reported in late April (here).

A few weeks ago in this space we highlighted some of the potential positives for ZNGA’s stock, which had little to do with the company and more to do with the technical set up of the stock:

From the MorningWord June 14th, 2013:

Much like GRPN at the lows, the stock is hated by Wall Street analysts (3 Buys, 18 Holds and 3 Sells), down dramatically from post ipo highs, and in the mix of management/business model turmoil.  But the most important point I would make is that the company has ~70% ($1.67 Billion) of their market cap in cash and only $100 million in debt.  Trading at $2.80, ex cash I think you could safely say this is a fairly cheap long term option.  We are getting long some down here with the idea that we will be early and likely have to sit with a loser for a while till the rest of the investment world gets hip to the potential sentiment shift.

Is ZNGA a sure thing?  Of course not, there are no sure things in this business.  But it’s a situation where the odds are skewed quite favorably for a buyer at these levels.  That’s our goal – looking for situations where the odds are in our favor, and trusting that over time, that leads to an overall positive outcome for the portfolio.  ZNGA’s one such situation, and if it does work out, prices will move far before most analysts change to a bullish stance.

The acknowledgement by the Founder and CEO that the company needed a leadership change was obviously the short term catalyst for the bottom in a stock that many have left for dead.  The real question is will “the Street” give the new CEO the benefit of the doubt, which could cause the very sentiment shift that we discussed a few weeks back.  As a comparison, GRPN’s shares are up almost 50% since reporting better than expected sales in early May, and of course Wall Street analysts followed suit with upgrades and positive earnings revisions.  ZNGA is up to almost $3.50 in the pre-market, up almost 25% from my purchase price on June 14th, and I see absolutely no reason why I should sell A SINGLE SHARE.  If Investors continue to take a shot on a cheap bet on the future of online gaming and the stock continues to rise, the negative sentiment demonstrated by the overwhelming neutral-ness of Wall Street analysts 3 Buys, 17 Holds and 4 Sells) will very likely cause the next leg of the rally when they are forced to change their tune.