Activision History Says Avoid Zynga IPO

Nov.18.11 | About: Zynga (ZNGA)

Gaming is technology's equivalent of the movie or fashion business. A company is only as good as its last hit and the glow can fade quickly.

Take Activision (ATVI). What a great company, right? Its shoot-em-up game Call of Duty 3 is breaking records both on consoles and on Microsoft's Xbox Network. It has delivered $6 billion in total revenue over its run, making it one of the top entertainment properties in the world.

Yet the stock's reaction has been, in a word, meh. If you put in for some shares at $14.25 on the morning of November 8, when the game launched, they would now be worth $12.15. The profitable trade was to take some shares in August, when they were under $10.50, then sell on the launch date. Buy the sizzle, sell the steak.

Why is that? It's because, as Daily Finance noted, gaming success doesn't last. ATVI is also the company behind Guitar Hero and World of Warcraft. Remember them? Then you're someone's mom or dad, because they're gathering dust in a corner of the closet. Both shone brightly, then faded.

It's a fashion business.

The history of Activision should be all you need to know in order to avoid the coming IPO of Zynga (ZYNG), home of Farmville and other popular Facebook games. Our Benjamin Goldman has analyzed the IPO, estimating the starting price at $15-20, which would be a PE of 195 times trailing earnings or “just” 105 on expected 2011 numbers.

Watch for a pop, and then short the heck out of it. How else can you play when you read that top management actually demanded early employees give up unvested stock or hit the bricks so as to avoid a “Google (NASDAQ:GOOG) chef” scenario, in which folks who had worked as cooks for that company walked away with $20 million after its IPO.

What, I ask you, is wrong with the Google chef story? Nothing, except Zynga's executives know that they're in a fashion business, where not only the titles but the venue can change at the click of a button.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.