Zynga’s 15% Stock Loss — Lemmings over the Cliff

The fall-off of Facebook shares can be traced to a number of things — whether or not they are legitimate. The first is that a some traders believe Morgan Stanley (NYSE: MS) and Facebook decided, at the last minute, to flood the market with stock to raise more money for the social network. There is a rumor that Morgan Stanley cut Facebook revenue forecasts right before the IPO. Major trading issues in the Nasdaq (NASDAQ: NDAQ) system, which delayed orders and rattled investors, might have been another cause. Two days before the IPO, General Motors (NYSE: GM) pulled its ads from Facebook. That seemed to be a bit of revenge, although no one can figure out why. And, perhaps most damaging, analysts attacked Facebook’s inability to make money on its mobile presence, which raised the question of its long-term viability as a growth company.

Zynga faced none of these problems. Its only trouble was being tethered to Facebook because it gets so much revenue from the social network. Facebook’s mobile strategy eventually could effect Zynga, but the balance of the long list of reasons Facebook shares declined really do not apply to the game firm. Zynga‘s shares may have fallen consistently since mid-April, but Wall St. had begun to warm to the company after its recent, better-than-expected earnings. Citigroup (NYSE: C) started coverage of the game firm with a “buy” and a $12 price target.

The Zynga share drop is no different from the reaction traders have when they sell Ford (NYSE: F) because of poor GM earnings, or drop Yum! Brands (NYSE: YUM) when McDonald’s (NYSE: MCD) announces poor earnings. As often as not, two companies in a related sector have very different financial results, for good reasons most of the time. GM has strong sales in China; Ford does not. Yum!’s operations in the U.S. do poorly; America is a stronghold for McDonald’s. Pairings like Walmart (NYSE: WMT) and Target (NYSE: TGT) or Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD) are often not pairs at all. If they really were parallel in almost every way, management skills would make no difference to results.

Zynga and Facebook may trade as a pair, but they are not one.

Douglas A. McIntyre