Hacker News Reader

Hacker News

Comment by goodcanadian | Hacker News Reader

Full thread

goodcanadian

OK, I have done a bit of math:

Book value (all assets - all liabilities): $2.46 per share

Book value less expected write off of $90M: $2.34

Book value less all intangibles: $2.01

Current Assets (essentially cash) less all liabilities: 0.78

Current market value: $2.35

So, the market is valuing it at exactly next quarter's expected book value. This means that they still believe there is some value in the intangibles (I don't) or the business (I don't).

For giggles, here are the some numbers for Research in Motion.

BV: $18.15 per share

BV less intangibles: 11.81

Current assets less all liabilities: 6.22

Market value: 7.76

View on HN

You don't perceive value the business? They still generate $300M in revenues per quarter. That sounds more like an emotional valuation rather than an objective valuation.

Yes, and they spend nearly $400M per quarter to generate that revenue. Using more precise numbers, their net loss over the last 4 quarters was about $0.73 per share. By my rule of thumb of awarding a P/E of 10, that makes the business worth -$7.30 per share.

Now in reality, that is a very simplistic analysis, and in point of fact, I do perceive some value in the business, just not very much. It is something that is very hard to quantify (as are other intangibles like copyrights and trademarks). In the end, I do have to go with my gut a little bit (as you say "an emotional valuation"). I don't personally have much use for Zynga's games or their business model, so I am aware that I might undervalue them somewhat, but what the the numbers tell me is that they are a poor business to invest in even at this "low" price. Other non-financial comments on this story and elsewhere reinforce my opinion that when it comes to doing business, Zynga has a lot to learn.

The most damning thing in all of this is that while the obvious salvation for Zynga is to be a roadkill acquisition by Facebook (where immediately much of their overhead is removed through reduced transaction costs), the market is placing a negative expected value on it.

Aside from no faith in management, what else could be the reason for the discount? Their business model is so bad that reducing the transaction costs can't fix it? They have hidden liabilities related to their copycat culture that haven't surfaced yet? Shareholder litigation? Or just simply a massive burn rate?

Wall street assigns a lot of value to management. And with reason - it is the management that has turned over companies such as IBM and GE over the years. The departure of basically the whole upper management of the company is the most ominous sign in this story.

>"Aside from no faith in management, what else could be the reason for the discount?"

At this point Zynga could be liquidated and still produce value. But the lower-than-book valuation implies the fear that Zynga will eat into its assets (re: cash) before that has a chance of happening, thus lowering its value.

So, basically, no faith in management...

From the parent level comment: The book value doesn't take into account an expected write off of $90m, which would drop the price per share to lower than the share price

This is accounting trickery. They chose to write down the OMGPOP acquisition all at once instead of depreciating that over a few years, same way Microsoft "lost money" by choosing to write down goodwill of aQuantive all at once. The cash flow statements reflect the picture better than income statement.

Ummm . . . they are currently losing money on operations, completely disregarding the write-down (which hasn't actually happened, yet). You are correct that companies often choose to make these write downs in quarters which are otherwise going to be bad. That is accounting trickery, but it is still a real loss that has happened regardless of when it is recognized. It is absurd to ignore it completely.

You cannot depreciate a write down. If you have an impaired asset, like OMGPOP, you have to write it down to whatever the new value is. Depreciation doesn't enter into the picture.

Yes and no. I suspect in practice Zygna have quite a lot of control over how to value OMGPOP, and could have chosen to (for the moment) value it somewhere closer to what they paid for it had they wanted to.

Based on US GAAP, whenever there is an "indication of impairment", ZNGA is required to present a model to the auditors justifying any goodwill and some intangible assets attributed to things like OMGPOP. If Draw Something suffers a user drawdown of 50% or 66% (not sure what the current daily users are) since the acquisition, they would be hard-pressed to justify to their auditors the value of the assets are anywhere near what they have on the books. They might have some wiggle room, but not nearly as much as people on this thread appear to believe.

A company that generates $300M per quarter has a "real" business, despite your disdain for their business model. ZNGA isn't like a business that spends $100 in ads to make $80 in ad clicks. They are making real games that millions of people appear to enjoy. I myself don't enjoy them, either, but I'm not going to just dismiss their business as having no value.

The main problem for them is that they haven't grown their revenues as quickly as they need to. But in order to turn themselves into a profitable business, all they need to do is cut costs. I've been to their offices and talked to friends that worked there, so I know there's plenty of room to cut costs. That being said, if their revenues drop, they could be in for real trouble.

That being said, I just dumped my entire position today (with my luck, right at the very bottom). My biggest fear is that their revenues keep falling, and they die death-by-a-thousand-cuts. If this quarter is a kitchen-sink quarter, then I might pick some up after they release their official numbers.

>A company that generates $300M per quarter has a "real" business, despite your disdain […] //

Did you miss the bit where they use $400M to generate that gross revenue?

How do you think they're going to save > $10M per month to put themselves in to decent profit? Which costs will they cut?

I guess you didn't go through their financials. You do realize they can cut expenses like R&D, SGA, etc, and probably not affect their revenues immediately. To me, they are like YHOO, where they have a bunch of people using the products through sheer inertia. YHOO in the past few years has been doing exactly that, which is cut costs relative to their revenues, and shown a decent profit, without affecting their income drastically.

ZNGA could do the same thing. They could cut R&D by 1/3, SG&A by 2/3, and even cut down on things like customer support, etc, and their current earnings for at least a few quarters wouldn't be affected immediately. They still need to create new games to entice those same users

I didn't because I thought you had some inside knowledge on the situation and that you might share it. They were questions of the non-rhetorical type.

>They could cut R&D by 1/3, SG&A by 2/3, and even cut down on things like customer support, etc //

Sounds great. When you say SGA, isn't that mainly wages. So, lay off most of their staff, do away with a large part of development and still generate the same earnings. Won't that just cause them to fail slowly?

I can see how Yahoo can coast on inertia to some extent but aren't Zynga more reliant on novelty? Yes new people come along, but they're entering - in social gaming terms - a pool of people who've already tired of a particular game/games.

What do you make of reports like this http://arstechnica.com/business/2012/08/as-zynga-stock-price... suggesting that several of the top developers are gone/going. Surely that would make it harder to cut R&D and make great new games.

Will be interesting to see how things progress for sure.

The problem with Zynga is that they are dependent on FB (who takes a share of their revenue - which is even worse). That's a huge risk.

Despite trying to step out from FB's shadow, they are still there- between a rock and a hard place.

I also agree it should be at current assets as well. no one should really count on the intangibles (particularly not goodwill)

What is the "short term investments" line item on the balance sheet under current assets? Are those corporate bonds or other highly liquid assets?

I don't know if I would go as low as net-net (current assets less all liabilities). The building is probably worth approximately what they paid for it. There is probably some furniture and computers and things that may or may not be worth their carrying value (depreciation is supposed to account for the decline in resale value).

It is always a bit sad when a company is worth less than the sum of its parts. I don't think Zynga is quite there, yet, but I don't think it is worth very much unless and until they sit down and learn how to run a business. I won't be investing in it.

You are correct that short term investments would be stocks or bonds or term deposits or any other highly liquid assets. Generally, they are as good as cash.

Reply on news.ycombinator.com