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TheStreet Open House

Zynga: Looking a Lot Like Netflix

NEW YORK ( TheStreet) -- Some of the best conversations start on Twitter (@Rocco_TheStreet) :

Active Tweeter and investor Conor Sen also told me that I'm beating a dead horse by hammering Zynga (ZNGA). Self-reflective dude that I am, I tend to agree.

In 2011, more than one person told me that I was beating a dead horse on Netflix (NFLX). We see how that turned out.

There's a big difference between NFLX criticism during 2011 and ZNGA criticism now.

I was bearish NFLX as the stock surged. Eventually, vindication came. WIth ZNGA, I was bullish on the way down; now I'm bearish after the carnage.

The peanut gallery yelps that I'm hammering ZNGA and its CEO Mark Pincus because I lost money on the stock. That's absurd.

I'm losing money on IBM (IBM) right now, but I'm not ripping the company. There's little, if any, incompetence at IBM relative to Zynga.

Larger issues that companies such as Zynga and Netflix illustrate come into play here. And, ultimately, that's what investors should consider.

First, there are uncanny parallels between the two companies that, independent of Zynga and Netflix, deserve critical treatment.

Insider Selling, Stock Options and Stock Buybacks

Netflix spent a good portion of 2010 and 2011 buying back stock. It spent millions repurchasing shares at prices in excess of its post-implosion market price.

The whole buyback scheme was curious.

Netflix never said much about the practice; the company just claimed it was making best use of free cash flow.

Some folks question the sense of a growth company buying back stock. Others wondered if Netflix was repurchasing shares to offset the impact of dilution caused by the exercise of massive amounts of stock options. On his own, CEO Reed Hastings regularly cashed out around a $1.5 million in Netflix stock per pop, alongside aggressive selling by other insiders and the company's employee program.

Netflix provided the classic case of a company destroying shareholder value, when it fundraised $400 million toward the end of 2011.

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