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Zynga’s share price collapses as status as "Facebook proxy" disappears

By on May 18, 2012

Zynga’s shares have fallen by 11.4% in the fast few minutes since Facebook started trading in the US. I’m kicking myself for not seeing this coming.

Back when I was an equity analyst, we used to talk about certain stocks being “proxies” for bets on other things. For example, regional newspapers were proxies for the classified advertising market. TV broadcasters for the display advertising market. Some stocks could be a proxy for the financial health of a country, or as a proxy for a privately held company.

That is where Zynga came in. If you were a public-market investor who believed that Facebook was a good investment, but were forbidden from investing in unlisted securities, what could you do it?

You could invest in Zynga as a “proxy” for investment in Facebook. It’s not the same thing, but it allows people who wanted some exposure to the fast-growing social network to get exposure at one remove. But what happens when the underlying asset (in this case Facebook), comes to market?

The proxy loses its alllure, and some investors sell out of the investor to fund an investment in the underlying asset.

Within minutes of the IPO, Zynga’s shares have collapsed. We’ll see if it rallies, but this may be demand for Zynga’s shares being sucked up by the Facebook IPO.

I should have seen it coming.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com