NEW YORK (TheStreet) -- Shares of Zynga Inc. (ZNGA) are lower by 3.79% to $2.66 in early afternoon trading on Monday, as the company's former CEO and current Chairman of the Board, Mark Pincus, is facing a lawsuit claiming he "unfairly benefited" from the sale of $192 million of stock in 2012, Reuters reports.
According to a court ruling Pincus benefited from the stock sale while other early investors were under a lockup agreement, which controls the supply of stock available for trading, Reuters said.
Zynga, a social games services provider, known for its popular FarmVille game, requested that the Delaware Court of Chancery drop the lawsuit, which alleges Pincus and some of the company's other directors violated their loyalty duties to shareholders by voiding the lockup agreement for certain investors, Reuters noted.STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.
In March 2012, Zynga's board waived the lockup agreement for Pincus and four directors, which allowed them to sell stock two months earlier than anticipated.
In April 2012, Pincus and the other directors sold their stock during the company's secondary stock offering, at $12 per share, almost double the stock's price when the lockup ended, Reuters said.
Pincus is arguing that the lawsuit should be dismissed since he and his co-defendants agreed to sell only 20% of their holdings. Pincus also argues that the lockup didn't hurt the plaintiff, shareholder Wendy Lee, or other shareholders, since the lockup expiration date did not change for them, Reuters added.
Separately, TheStreet Ratings team rates ZYNGA INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:
"We rate ZYNGA INC (ZNGA) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income and disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Software industry. The net income has significantly decreased by 83808.8% when compared to the same quarter one year ago, falling from -$0.07 million to -$57.06 million.
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Software industry and the overall market, ZYNGA INC's return on equity significantly trails that of both the industry average and the S&P 500.
- This stock's share value has moved by only 28.35% over the past year. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- The revenue fell significantly faster than the industry average of 28.1%. Since the same quarter one year prior, revenues fell by 12.8%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- The gross profit margin for ZYNGA INC is currently very high, coming in at 80.75%. Regardless of ZNGA's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ZNGA's net profit margin of -32.30% significantly underperformed when compared to the industry average.
- You can view the full analysis from the report here: ZNGA Ratings Report