Why Zynga Soared While Lululemon Slumped Monday

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2022 hasn’t gotten off to the best of starts for the stock market, and the Nasdaq Composite (NASDAQINDEX:^IXIC) has taken the brunt of the damage so far. The index was down 4% in the first week of trading in the new year, and on Monday morning as of 8 a.m. ET, futures on the Nasdaq were down another 153 points to 15,428.

Adding to the Nasdaq’s woes on Monday morning was Lululemon Athletica (NASDAQ:LULU), whose shares fell after the yoga apparel retailer gave downbeat news on preliminary results from the holiday season. However, Zynga (NASDAQ:ZNGA) got a nice move higher as the company eyed a combination in the video game space that could bring a nice premium for shareholders. Let’s look first at Zynga’s big news and then turn to what had Lululemon investors in a funk to start the week.

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Zynga levels up

Shares of Zynga were up more than 50% in premarket trading on Monday morning. The mobile game specialist and its would-be acquirer announced their plans to combine forces to become a bigger player in video gaming.

Take-Two Interactive Software (NASDAQ:TTWO) will acquire all of Zynga’s outstanding shares in a deal that values the company at $12.7 billion. Under the terms of the deal, investors will receive $3.50 in cash as well as $6.36 worth of Take-Two stock for every Zynga share they own. Unlike many deals in which the amount of stock compensation per share is fixed at the time of the agreement, Zynga agreed to a mechanism that will look at where Take-Two’s stock price is immediately before the acquisition closes. That special provision will protect Zynga shareholders against downward moves in Take-Two’s stock but will also potentially limit their gains if Take-Two shares rise in the months to come.

Take-Two and Zynga gave many reasons for the decision. Combining forces will create an industry-leading portfolio of console and mobile games, boosting scale at a critical time. Take-Two expects to save $100 million annually from the combination, and sharing assets like developers and ad platforms should pay dividends as well.

Take-Two shares fell nearly 9%, suggesting that investors believe the company might have overpaid for Zynga. Nevertheless, with the success of mobile gaming, it’s easy to understand why the two companies decided that consolidation was a smart strategic move.

Lululemon feels the burn

Elsewhere, shares of Lululemon Athletica were down nearly 6% in premarket trading. The retailer’s holiday performance wasn’t as good as many had hoped, bringing new downward momentum for a stock that had already lost 25% of its value in less than two months.

Lululemon updated its fourth-quarter guidance in a way that disappointed investors. It said that revenue will likely come in at the low end of its previous range of guidance between $2.125 billion and $2.165 billion. Moreover, earnings will also be somewhat disappointing, with indications suggesting the lower end of a range of $3.25 to $3.32 per share.

CEO Calvin McDonald blamed the shortfall on the omicron variant. The rise of the new coronavirus strain led to capacity constraints, limited availability of employees, and cuts in hours for certain brick-and-mortar store locations.

Those looking at Lululemon’s fundamental prospects have generally been bullish on its business, but that hasn’t prevented a big share price contraction lately. Given the yoga apparel company’s record of growth, an environment in which growth stocks are getting punished isn’t likely to be favorable to a company that can’t beat investor expectations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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