As many already know, Zynga (ZNGA) recently bought OMGPop, for around half the money it could have cost. Let's see how Zynga got the discount, and what this means for the stock. Along the way, let's ponder Starbucks (SBUX).
For starters, we take a look at the upward movement in Zynga from the day of the OMGPop announcement:
Click to enlarge
Of late, we can that Zynga shares are in a less volatile range, which is as I predicted:
I am revising my volatility prediction bullishly. I now imagine a steady movement breaking the range, towards my price target of $16. Zynga is like Starbucks. You hear about some new opportunity, like gambling or alcohol sales, and the stock goes up. Then you find out that it gets even better. Like, new platforms of expansion such as an independent website or a single-cup expresso machine. The stock moves up. You wonder, where is the room for growth coming from? And you realize, the company is run well. "Saturation" is the wrong thing to worry about in the case of an innovative, dominant company.
The truth is Zynga's business model is new and hard to predict. I found a honey badger heuristic, and it has worked well so far. One thing about honey badgers is they often "eat" whomever competes with them. Positive confirmation for this heuristic arises from Zynga's eating of OMGPop.
Cheaply, Zynga ate the future of the company, and this discount arose from Zynga's competitive position. Zynga could have made a knock-off version of OMGPop and cut into its market share. OMGPop employees didn't like this. They wanted to avoid the negative. Some positives were offered to them, one of which was cash, which Zynga has plenty of. Another positive OMGPop employees saw was the opportunity to leverage their creativity with new jobs at Zynga; $30MM was allocated for these jobs. It's 'good Zynga, bad Zynga' showing off its well-known instinct for negotiation.
Like Starbucks, Zynga adds value to an addictive commodity. Like Starbucks, Zynga has a charitable side. "Sustainability" is the key word here. That's holds true, if you're a bear. The bear case is that Zynga doesn't have anything special; the bull case is that Zynga doesn't have to, because it's like Starbucks - the brand is everything.
A brand is more than a trick to get people to buy generic stuff from you. It's a convenient signal of a certain threshold of quality. Clearly the Zynga brand excerpts a network effect - but so does Starbuck's. I can reliably set up a meeting with you and suggest Starbucks. Everyone knows what to expect, and that is a social phenomenon. I can give you a Starbucks gift card no matter where you live, because that is how the brand works. Starbucks has an international network, which is expanding. Zynga has a pre-established international network, which is deepening.
So if you want to say that Zynga is headed to $3 a share, if you want to say that Zynga overpaid for OMGPop, then you should be saying "short Starbucks", because you "just don't get it".
Charts sourced from Google.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
