Zynga (ZNGA) Changes the Game

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Two weeks ago I made the case for going long ZNGA. This view was contingent on a few things happening: ZNGA coming out with a hit title or announcing layoffs to streamline their cost structure. Surprisingly, the company’s announcement 4 trading days ago accomplished both in one fell swoop. While I was admittedly shocked the company choose to make a large acquisition given their disastrous M&A history (the NaturalMotion deal was $527MM; nearly $400MM of which was paid in cash), after a bit of digging I experienced a 180 degree shift in my opinion. There are a few reasons I think this acquisition is a game changer for the company:

Calico Resources (CVE: CKB) Downside Realized

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An email I just received from Buck – the CEO of Calico Resources – is all one needs to know. Looks like Rockstar will not proceed with the purchase and the downside case is realized.

We have issued a press release regarding RockStar. They did not make the second payment.

– Buck

Boston Beer Company (SAM)

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Boston Beer Company (SAM)
Stock Price: $212
Diluted Shares: 13.5MM
Diluted Market Cap: $2.9BN
Working Capital Surplus: $50MM
Debt: $0
EV: $2.85BN
2013E EBITDA: $150MM
EV / EBITDA Multiple: 19x

I suspect The Boston Beer Company is about to take a dramatic fall. Others – like Off Wall Street – have said similar things. Unfortunately their timing was horrendous as the stock ripped 100 points in the wrong direction. Who says short selling is easy?

But today I believe a fairly significant multiple contraction is underway. For hedgies looking for alpha shorts, SAM presents a very attractive risk-reward.

Calico Resources (CVE: CKB)

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Sometimes, free money can be found. Usually it comes with a caveat.

Calico Resources (CVE: CKB) is one of those opportunities. It trades on the Canadian Venture Exchange for less than $0.23 (approximately $11MM). In 1 month, they will be selling their primary asset for $27.5MM. This information is publicly available (see here and the update here).

Once you factor in the issuance of dilutive shares (64.15MM shares), you get a value of $0.43 per share (that is $27.5MM / 64.15MM; note that I am assuming their historical operating losses shield them from paying taxes on this transaction). So if this deal closes, CKB will have cash worth nearly 2x its current market cap, plus retain a 1% royalty on the project if it gets developed.

From a risk-reward perspective, this is incredibly attractive: the market is offering you 2x upside versus perhaps ~50% downside. Further, once you factor in the probability of the deal closing (a scenario I view as “high probability” for the reasons cited below), you get an even better probability-adjusted risk-reward.

Zynga (ZNGA)

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Zynga (ZNGA)
Stock Price: $3.50
Diluted Shares: 804.1MM (diluted sharecount up 7% Y/Y – these guys have no problem handing themselves stock)
Diluted Market Cap: $2.8BN
Cash & Marketable Current Assets: $1.2BN
Long-Term Marketable Securities: $426MM
Debt: $0
Other Liabilities: $208MM
EV: $1.4BN

The image at the top of this post is a tad misleading. You see, Zynga is a battleground stock.

Bulls will say: this is just like Groupon before it gained 150%; the company has been left for dead, there are too many bears; new CEO Don Mattrick has 6 months under his belt now and he’s going to (a) do a big cost cut and (b) start to unveil a new line-up of games starting mid-year; don’t bet against Mark Pincus or this Board.

Bears will say: casual gaming is not a viable strategy in the long term; there’s no moat in this business; their best employees simply leave to start a competitor; they are too dependent on FB; the turnaround will fail; how can you trust an admitted scammer who wastes money on lavish parties and has a history of destroying shareholder value?

Intellectually, I side with the bears. But the truth is probably somewhere in-between.