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Game Over For Zynga

April 19 by Ben Brown

The stock market: a place where money can be made and lost. The market’s also where reputations can be made or broken – and some people or incidents can live on in infamy…

In this section, which serves as a counterpart to the ubiquitous Monday Motivation posts that can get on a cynic’s nerves, we spotlight the blunders, bloopers and swindlers of the stock market.

Suffering from Monday blues? The only consolation we can offer is – it can always be WORSE!

Monday Demotivation: Game Over for Zynga

No one saw Zynga’s fall coming. Not until it hit. This is the story of what happened on that day in 2012 to the games company (famous for Farmville, Cityville, and all those annoying Facebook notifications). But first, a bit of background information on company earnings reports and black swans (stay with me, it’ll all make sense…)

zynga farmville

 Earnings Season

Every quarter, traders look forward to ‘earnings season.’ It’s a recurring period of a few weeks during which almost all public companies open their books. They show their figures from the last three months, and tell investors what to expect for the rest of the year (and perhaps even further into the future).

Now, this might sound like a big surprise every quarter, but investors kind of know what to expect. Geeks from Wall Street have already crunched the numbers and made regular forecasts about a company’s earnings figures.

So we pretty much know what’s coming. Nine out of ten times, these analyst forecasts are bang on the money. Of course, a company can always surprise – in both positive and negative ways. When this happens, we tend to see the biggest stock movements.

As you might have guessed, our Zynga story takes place after one of these earnings reports.

 A Black Swan

And then there is always the risk of a so-called ‘Black Swan event’. A Black Swan event is something totally unexpected. It’s random and unpredictable.

zynga crash

A recent example is Volkswagen’s ‘Dieselgate’, when it was discovered the cheeky bastards were rigging their emissions results. The company’s stock lost 40% in a matter of days.

The ‘dot com bubble’ of 2001 and the housing market crash in 2008 are two more examples of Black Swans. But it could be anything – like a natural disaster, for example. After such events, the market makes a brutal correction either up or down.

Anyway, back to Zynga.

 Q2 2012: Zynga reports its Earnings

On that fateful Wednesday of 25th July 2012, Zynga released its second-quarter earnings report. Enter the Black Swan.

You see, Zynga had a problem. Most of Zynga’s games operated through Facebook (you remember the endless requests to play FarmVille, right?)

So you should know that, at the time, investors were worried about Zynga’s reliance on Facebook. The social network had only just launched on the stock market, and its IPO (initial public offering) was a nightmare. Facebook was immediately considered overpriced and its stock lost a lot of money. Because Zynga was so tightly reliant on Facebook, investors viewed Zynga with the same scepticism.

Still, no-one could have predicted just how far Zynga’s stock would drop on that day. The game maker came out with an earnings report WAY below expectations. Especially the ‘profit per share’. It was expected to come out at 6 cents per share. It came in at just 1 cent.

Zynga had to admit defeat:

zynga sorry

“We are lowering our outlook to reflect delays in launching new games, a faster decline in existing web games due in part to a more challenging environment on the Facebook platform, and reduced expectations for Draw Something.”

Ouch. The market had heard enough and the correction was vicious. Zynga fell almost 40%. That’s something you rarely see after a ‘normal’ earnings report.

 And Now?

Well, it’s in our nature to leave you with a happy ending to this horror story. The good news is that Zynga lived to fight another day. The company still exists and it can be traded in our BUX app. It’s still a lively and exciting stock to trade, although it has never reached the dizzying heights of 2012. But hey, at least they don’t send annoying Facebook notifications anymore.

Written by

Ben Brown

Ben is one of our writers on the ground in London. By day he writes sensible news stories for The Huffington Post. By night, he injects fierce wit into the stock market at BUX.

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