Not Walken the walk

WalkenTalken sets out arguments about stocks exactly like I’d want them presented. Too few videos make use of retiring celebrity voices to make a case for going long/short on equities. I’m just glad to be one of the first to witness the paradigm shift, as the qualities that made his performance in The Deer Hunter an Oscar-winner are brought to bear in finance, and made available for all via StockTwits.

Viewers should be excited to note that much of Walken’s performance in the 4:53 short film draws on his landmark work in The Deer Hunter, and the ageing actor (despite the late career change) has lost none of his artistic flair or humanity. The erratic, confused analysis might seem loose or vague to financial careerists. But as with the Oscar performance of 1978, WalkenTalken treats the viewer to a brilliant portrayal of a broken man, returning home from harrowing experiences, trying to organise his thoughts, his life, and move on. It is WalkenTalken’s refusal to let go, and abandon trauma, that we (the viewers) know will eventually be his undoing.

WalkenTalken is long Zynga at 8.60.

“It’s coming back on the Facebook IPO. I’m loading up now!”

As I lay awake, digesting the gravity of WalkenTalken’s performance, two thoughts about his character’s haunting game of Wall Street Roulette cross my mind:

You never know when your luck is going to run out:

Zynga owners have been suffering recently as the market has become aware of Zynga’s difficult position, and the defensive strategy adopted by the company’s management. As Zynga tries to retain a market leadership in an environment with low barriers to entry and fast-churning products, it has bought (at the height of popularity) “hit” titles, hoping to convert the products into “sticky” collections of products, lowering attrition and cementing a competitive advantage.

However, as with almost all products in this marketplace, the “hit” titles bought by Zynga also suffer from high user attrition rates, and are diminishing in popularity very quickly, leaving recently acquired development houses such as OMGPOP with the burden of filling the user-gap. But with the success rate for titles (certainly if by “success” we mean Draw Something levels of popularity) being very low indeed (OMGPOP developed 50+ non-hit titles before Draw Something; Rovio have many non-hit titles predating Angry Birds), it is probably the case that the acquisitions were too ambitious. The market has discovered that Zynga’s strategy doesn’t work, and that they have worsened the position for shareholders.

Draw Something’s attrition rate, considering the timing of the acquisition, supports the view that Zynga’s M&A is diminishing shareholder value

Now – what does that mean for the “Facebook IPO-pumpers” at work today? It certainly means a rough ride immediately after the IPO in mid-May, at which point Zynga “hits” will have had time to slide further through the product lifecycle, and management will be facing real pressure to develop a more sustainable long term strategy. If the Zynga price does bump around the time of the IPO, I would still expect it to belong well below $10 soon after.

You’re in Nam son; no-one (not even Facebook) is coming to save you:

However, my real problem is that I don’t fully understand how the Facebook IPO will bump the price of Zynga through any process other than misguided speculation. Yes – the Zynga/Facebook relationship is clearly an important strategic facet of both companies’ operations. Zynga relies on Facebook as a portal for promotion and provision of its content to a ready user-base, and Zynga has been more active than any other gaming company in seizing the opportunity that the Facebook network provided. Facebook finds Zynga useful, insofar as Zynga products enhance the experience of Facebook users, and keep them logged in and spending for longer.

An important thing to remember however, is that the relationship (although initially strong – with Zynga being the first gaming company to make a serious play on Facebook’s users) is weakening. Other games companies have entered the space, and have the opportunity to have the same relationship (same value chain, same commission on user spend) with Facebook. The percentage of Facebook revenue attributed to Zynga games has fallen to 11%, as customers move away from ageing hits like Farmville and Mafia Wars to newly developed games released by EA and other smaller houses (Peak Games, Geewa). Monetisation of Zynga titles (ARPU) has also fallen. Facebook doesn’t care what its users are spending money on, or what they are playing. If Facebook users want to play EA titles, or Kixeye titles, or whatever titles are released, they will as happily take the 30% from other houses as they took it from Zynga.

But (and it’s a huge “but”), the Facebook IPO should have very little bearing on the situation, as it exists today. I think the thing I am struggling to understand from the analysts pumping Zynga as “a play on the Facebook IPO”, is what bearing the IPO cash will actually have on the Zynga/Facebook relationship. I can’t see a clear connection between a cash-rich Facebook on May 18th, and shareholder value being generated for Zynga-holders.

War is hell:

Zynga is a difficult stock. I predicted it had a way to fall from $10, and I think that at $8.95 (where it closed up today), it has risen a way above what I would consider a fair value.

My interest, as someone observing the global gaming market, is in its long-term valuation, not the stock volatility expected on May 17th, and an antecedent speculative bubble. However, I can’t help but feel that the hype surrounding the IPO has become a de facto part of the Zynga valuation. Which leads me to question the extent to which the Facebook offering will have an effect.

I feel like Zynga’s weak acquisition strategy, quickly ageing product lineup and difficulty in creating any lasting economic moat show the company to be in a strategically difficult position. And it’s not clear to me how the Facebook IPO changes the situation. The long-term prospects for the company remain tied to improving monetisation of the mobile products, and developing new product lines which better retain users. They aren’t currently being held back by Facebook’s private ownership.

Until the company’s true constraints are addressed, shareholder value will continue to diminish.

I am left sympathising with WalkenTalken’s character’s predicament; the protagonist trying to understand a messy war, the outcome of which will be wasteful and hollow.

The sensible thing: getting the hell out

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One comment

  1. WalkenTalken

    Like it, good stuff, can’t argue with your logic, think shorts are exhausted though and $10 then $11 sets up better short opportunities. That’s why I started getting long before the rev H&S that looked like it was setting up but that tumble below $8 had me worried. Still long though and always evaluating. Even epic actors can rethink a position or improvise a line, young mahn…

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