Schaeffer's Trading Floor Blog

Weekly Contrarian: Zynga's Woes Seem Far From Over

Bullish sentiment surrounds ZNGA, despite its dismal technical showing

by 12/20/2012 1:08 PM
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In a recent article entitled "Can a troubled Zynga reinvent itself?", the author gives a laundry list of fundamental troubles facing Internet gamer Zynga Inc (NASDAQ:ZNGA), including lethargic sales, internal issues, litigation concerns, and management woes. The columnist pulls into question ZNGA's role in the online arena as a leader versus follower. Critics claim the company is too focused on copying games in an effort to rush them into social networking marketplaces such as Facebook Inc (NASDAQ:FB), instead of innovating new ideas. The writer specifically cites CEO Mark Pincus as a catalyst in ZNGA's current state of chaos, saying he "is driven more by hard data, serial titles and financial results than by taking risks on creative games development," according to former employees.

In order to thrive in the growing market of online gaming, the author concludes that ZNGA "not only needs to get a foothold in forming midcore titles amid creative refocusing, but must determine how to grow on and other destinations in the absence of a clear Facebook advantage while at the same time keeping its casual audience going. And it needs to grow its mobile presence in an increasingly competitive landscape on Android and iOS."


ZNGA's chart troubles have been well-documented, with the shares shedding roughly 76% since last December's initial public offering (IPO). More recently, the stock has lagged the broader S&P 500 Index (SPX) by nearly 17 percentage points during the past three months. ZNGA's poor price action has been highlighted by its 20-week moving average, which has ushered the stock lower since late April. This trendline also put a quick halt to last week's rally attempt.

Option players have paid no mind to ZNGA's trek lower, as evidenced by data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Over the course of the past 10 sessions, traders have bought to open almost 21 calls for every put on the stock. What's more, this call/put volume ratio of 20.68 ranks just 5 percentage points from a 52-week peak, suggesting bullish bets have been accumulated over bearish at a near annual-high pace in recent weeks.

This trend toward calls is echoed in the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.50. Not only does this show that call open interest doubles put open interest among options expiring in three months' time, but it ranks in the 34th percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward ZNGA.

It's a pretty hopeful scene outside of the options pits, as well. Short interest currently accounts for just 2.4% of the stock's available float, and it would take less than one session to cover these shorted shares, at ZNGA's average daily pace of trading. Additionally, the consensus 12-month price target of $4.08 represents a brazen 69% premium to the equity's closing price of $2.41 on Wednesday, Dec. 19 -- and sits in a neighborhood not visited by the stock on a daily closing basis since July 25.

From a contrarian standpoint, ZNGA's technical woes may be far from over. With such high expectations surrounding the underperforming stock, a re-evaluation from these remaining bulls could open the door for additional losses in the near term.

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