Amazingly, some universities continue to teach EMT. If you're a student attending a university that teaches EMT, ask how it explains Zynga's 10% one-day drop because its CEO didn't inspire confidence during his interview at the Bank of America (BAC) Merrill Lynch Global Technology Conference. If you didn't listen to it, you can here.
EMT can't explain it, but behavioral finance can. Rationality left the building for Zynga's shares during Thursday and Friday trading and with raw emotion replaced it. Fear of ever-greater losses moved shareholders to create an avalanche of sell orders. Zynga closed Friday at $2.97, down nearly 22% for the year to date.
If you want to understand what drives stock prices, you're probably better off studying psychology instead of finance because sentiment, fear and greed dictate stock prices on any given day. Logic may rule over the long run but it can take an incredible amount of time to arrive. Logic isn't measured in days, weeks or even months, its journey is often measured in years.
On Thursday alone over 150 million shares traded hands and did the investors frantically placing sell orders think about who was on the other side? I think not. Because if they had the sellers may have remembered that for every trade there is a buyer and seller. For everyone that sold Thursday thinking that was the best price they could gain, someone was on the other side believing that was the lowest price they could purchase shares.
I bought shares on Friday because I don't believe the company changed.
Who will ultimately be proven correct? I think the buyers will, but I turned from bearish to bullish in January. That's when I discovered Zynga is the largest free poker site and also U.K. licensed to host real money poker and other casino type games. Zynga announced it added bitcoin as a payment option.
It may be difficult to fully appreciate the importance of bitcoin, Zynga and poker if you're not familiar with the world of credit card merchant accounts. Every business uses a merchant account to accept credit card payments. Some have several, one for Visa (V) and MasterCard (MC). Another for Discover (DFS) and American Express (AXP).
Each business pays a discount on the total amount charged and that varies by the type of transaction and business. If you walk into Walmart (WMT) and buy an Apple (AAPL) iPhone for $100, Walmart may receive about $99.
The merchant credit card processor and the credit card companies keep the difference. If you ever wondered how Capital One can offer points to cardholders for using its card, it's able to do so from the fees it charges business when you use it.
If you buy the same Apple iPhone at Amazon (AMZN), Amazon may only receive $98 because it's an internet order. Internet orders are considered higher risk because it's easier to commit fraud when you don't have to physically hand a card to a store employee.
It doesn't stop there, though. Different types of internet businesses have different risk categorization rates. Amazon enjoys one of the most favorable credit card merchant rates of any Internet company. There are two reasons for this. First, Amazon isn't likely to go out of business leaving the credit card merchant processor with a bunch of credit card charges without the corresponding product shipped.
Second, Amazon is primarily selling physical goods and customers are less likely to file a dispute if they have the product they ordered. What's more, likely to have a disputed charge? Poker chips paid with a credit card. That's why most merchant processors won't accept online gambling sites and the ones that do charge much more than 2% to do so. Facebook (FB) takes about a 30% cut from Zynga's Facebook-generated revenue.
High-risk category credit card merchant processors may take 15%, 20%, or more depending on the business. On top of the high merchant fees, many losers will dispute the charges (winners don't), and fraud is a big concern as well. On the other hand, once a person or business receives a bitcoin payment it's theirs and can't be disputed.
Instead of paying Facebook 30% or a merchant account 4%, bitcoin transactions cost only 1% or 2% to convert the payment into cash. Bitcoin opens up the world of online gambling in an exciting way that didn't exist only a few years ago. The payments are as good as cash. If American Express doesn't want to allow gambling charges, it's no problem, just buy bitcoins and in the amount of time it takes for electrons to move from your computer to Zynga, you can have credits in your account.
It's a total game changer (cheesy pun I know) that opens up tremendous opportunities for Zynga. The combination of real money online poker, bitcoin, and Zynga's market dominance moved me from the bear camp to the bull camp.
Just as exciting are the prospects that a Chinese firm may want to partner or outright buy Zynga. I explain in detail in another article so I won't repeat it here, but allow me to point out that China is growing much faster than the U.S. and will overtake the U.S. as the number one mobile market this year.
Understanding the above opportunities that lay waiting at Zynga's feet, it's no surprise the shares tanked when CEO Don Mattrick dismissed online real money gambling as unimportant and claimed China is a challenging market. Can anyone tell me what he was thinking? I don't know.
I do know that if a guy (me) from the north woods of Wisconsin can jump on a jet and go to China and successfully establish business relations in 2003, Zynga can, too. Yes, it's a different culture with different norms, but you figure out the landscape and adjust to your environment. Apple's CEO Tim Cook made the trip. Mattrick should fire whoever convinced him China is too challenging and hire someone with a 'can do" attitude and cultural understanding.
Online poker represents by far the biggest opportunity Zynga has, and bitcoin makes it easy. It's time to expand beyond the U.K. and tap into other markets were legal. Mattrick needs at least to acknowledge to shareholders they're working on it.
The market is barking loudly at Zynga. Is anyone listening?
At the time of publication, the author was long Zynga.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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