Traders joke that when a stock is losing money, it is now known as a long-term investment. Not all declines mean the same thing. A share may decline for these reasons:
1. Missed quarterly result
2. Broken business model
3. Over-valuation
Out of the reasons listed above, there is only one instance when investors should be averaging-down, buying, or not selling their existing holding: a missed quarterly result. A bad quarter can happen for many reasons. For example, a company may miss a close for a large customer order or may have temporary operational problems that need to be addressed. When a problem is temporary, it creates a buying opportunity, but when a problem is chronic, investors should exit a losing position.
How To React when a $14 Stock Drops to $2.
Zynga (ZNGA) is a company that went public at the right time. When the stock market was optimistic and investors felt growth would be forever in social media companies, Zynga sold at a rich valuation. After Facebook (FB) changed the way apps were found on its site, usage for Zynga games declined rapidly. Zynga even said it would enter the online poker market.
Last week, Zynga said that it would see:
- Bookings between $1.085 billion and $1.1 billion, down from a previous guidance of up to $1.225 billion
- Revenue of $286.4 million, down from $300 million to $305 million
- Earnings (EBITDA) of $147 to $162 million, down from $180 to 250 million
- 3rd quarter earnings of between zero and negative $0.01 per share
The news gets worse: Zynga admitted its acquisition for OMGPOP was too much, and will write-down its intangible assets for OMGPOP. OMGPOP founders Paul and Dave Bettner also announced they were leaving Zynga.
The revenue cut will hurt Facebook. Facebook was expected to get $797 million from payments received from Zynga. The revenue payment is now projected to be $582 million.
Investing Ideas
Zynga is one of many examples of an investment gone wrong. RadioShack Corp. (RSH) is another example, as is DragonWave (DRWI). DragonWave is burning cash very quickly, after the company acquired Nokia Siemens Networks’ (NOK) microwave business. Looking at some companies close to a 52-week low, these are select companies are not on chronic decline and may recover.
1. Canon Inc. (CAJ, Earnings, Analysts, Financials): Through its subsidiaries, manufactures and sells network digital multifunction devices (MFDs), plain paper copying machines, laser printers, inkjet printers, cameras, and lithography equipments primarily under Canon brand in the Americas, Europe, Asia and Oceania.
2. Activision Blizzard, Inc. (ATVI, Earnings, Analysts, Financials): Publishes online, personal computer (PC), console, handheld, and mobile games of interactive entertainment worldwide.
3. Electronic Arts Inc. (EA, Earnings, Analysts, Financials): Develops, markets, publishes, and distributes game software and content for video game consoles, personal computers, mobile phones, tablets and electronic readers, hand held game players, and the Internet.
4. THQ Inc. (THQI, Earnings, Analysts, Financials): A worldwide developer and publisher of interactive entertainment software for all game systems, including home video game consoles, such as the Microsoft Xbox 360 (Xbox 360), Nintendo Wii (Wii), Sony PlayStation 3 (PS3) and Sony PlayStation 2 (PS2); handheld platforms, such as the Nintendo DS and DSi (collectively referred to as DS), and Sony PlayStation Portable (PSP); wireless devices, including the iPhone, iTouch and iPad, and personal computers (PCs), including games played online.
Companies mentioned in this article:
5. Nokia Corporation (NOK, Earnings, Analysts, Financials): Provides Internet and digital mapping and navigation services worldwide. The company sold the microwave division from Nokia Siemens Networks’ division.
6. DragonWave Inc. (DRWI, Earnings, Analysts, Financials): Provides wireless Ethernet equipment for emerging Internet protocol networks worldwide.
7. RadioShack Corp. (RSH, Earnings, Analysts, Financials): Engages in the retail sale of consumer electronic goods and services through its RadioShack store chain and kiosk operations.
Written by Chris Lau. Disclosure: Author holds a long position on EA.
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Dollar bill origami by Won Park.
Paul and Dave Bettner are not the founders of OMGPOP. The are the founders of Newtoy, acquired by Zynga in December 2010. Charles Forman was the founder of OMGPOP, and Dan Porter was CEO at the time of its acquisition by Zynga.