What Zynga’s Price Action Says About Facebook

Facebook recently filed its S1 for its IPO sometime in the coming year.  The enthusiasm about Facebook could be seen throughout the financial markets, particularly with money pouring into Zynga.  Facebook has been and will be the most anticipated IPO of 2012.  Similarly, Zynga was the most anticipated in 2011 and we all know how that traded on its first day.  Facebook will likely be a different story, with retail and institution investors battling to get shares.  Price action on Facebook will be very exciting on the first day of trading, and will likely bring back the movements not seen since the tech bubble.  The point that investors should pay attention to is the recent price action in Zynga.  Zynga’s recent fluctuations can be used as a signal what is in the future for Facebook.  Below is a graph of Zynga since its IPO with a few highlighted points to be discussed.

As obvious through the chart, the sentiment when the stock went public and for some time thereafter was negative.  This sentiment changed dramatically when talk of Facebook raised enthusiasm for the stock.  As arrow 1 shows, the stock reached new highs on Facebook optimism.  Investors could not trade Facebook so they played the second best option.  What does this mean?  This means that investors are dying to get in Facebook and will do so in any shape or form.  In reference to Facebook, this suggests exciting price action in the future.  Observing arrow 2, we see a dramatic drop in the stock occurred.  Understanding the deep drop gives us a hint of what to expect with Facebook.  Arrow 2 reflects bad earnings by a company that was expected to perform well (they value my time on Facebook at over $100, a laughable idea being that I have never clicked on an advertisement).  Those that get into the stock pre-earnings will likely loose there pants, until we see a stronger revenue machine.  This was followed by arrow 3, which represents renewed enthusiasm once again for Zynga.  Facebook will likely follow the same trend described above in Zynga.  The stock will trade on optimism and make big moves that investors will not want to miss.  At the same time it will be extremely over valued and the numbers will fail to support the valuations.  Most likely investors will not care and as arrow three shows will continue to get back in the stock even after bad news.  Use Zynga as an omen of Facebook and take notes because when the price action happens in Facebook it will happen fast.

“Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected. Simply put: we don’t build services to make money; we make money to build better services.” – Mark Zuckerberg


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