Why Did Zynga’s Weak Earnings Report Push Up Shares?

In the 14 months since Zynga (NASDA:ZNGA) made its initial public offering, the online game developer has done just the opposite of gain momentum: games have been dropped, players have moved on, important executives have split, and shares have dropped from a high of $14.69 in early March of 2012 – four months after the IPO – to Monday’s closing price of $2.56.

After reporting earnings that slightly beat analysts’ expectations after the bell on Tuesday, Zynga’s shares jumped 5.47 percent to $2.89. But analysts had predicted the company’s fourth quarter to be weak, and it generally was. Revenue came in at $311 million, inline with the results from the year-ago quarter; daily users of its games fell 6 percent from the third quarter; and the platform’s casual users dropped as well.

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But earnings amounted to a penny per share, better than the 3-cent loss that analysts had estimated.

Shares increased 7 percent to $2.73 before the stock market closed and earnings were released, pushed up by an upgrade to “buy” from Bank of America’s Merrill Lynch. Along with the rating change, the firm’s analyst Justin Post increased his price target for the company’s shares to $3.40 from $2.70, citing Zynga’s asset value and the stabilization of its mobile business. This poses a stark contrast to a string of recent headlines that have predicting Zynga’s fourth quarter report would show its impending demise…

In an pre-earnings note seen by The New York Times, Wedbush Securities analyst Michael Pachter stated that he had 100 percent confidence” the company could pull off a turnaround but “zero confidence that they will.”

Zynga may have pioneered the concept of social gaming, the publication reported, but from its recent string of poor earnings reports it could have been a case of “merely being in the right place at the right time, a condition also known as dumb luck.” Much of Zynga’s success came as a result of its connection to Facebook (NASDAQ:FB), which gave games like Farmville and Mafia Wars preferential treatment and helped popularize the game provider’s offerings. When the company went public, its offering was expected to be as large as $20 billion for a time. Even though it only went for about half of that amount, it was still an accomplishment for a company less than five years old

But the craze wore off, and Zynga now has major problems.

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