The Long Case for Zynga
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Gaming leader Zynga (NASDAQ: ZNGA) has been defined, ‘friended’ and decidedly marked by Facebook (NASDAQ: FB). Investors have projected the woes of the social giant on the world’s leader in social gaming. But they’ve missed the real reasons why this gaming powerhouse is a strong long-term buy.
I couldn’t ask for a stock with such differing viewpoints on its future. There is the camp that purports Zynga is losing user interest and that gamers aren’t as addicted to their farms or cities as they once were, while the contrarians find Zynga is undervalued based on the subscriber base and income projections.
I subscribe to the latter but there’s another simple reason that these two camps have it all wrong.
The future of smart-phones, tablets and the vast majority of technological user interaction is mobile. Applications and platforms that capture the attention of users are going to control their access to advertising.
In the same way Google monopolized search and the advertising dollars that flowed after it, mobile will dominate the internet’s next iteration. But this is nothing new, and most pundits will agree with me.
However, this is where they log off and we stay connected.
Mobile is fad driven.
These application and game fads become trends, and then habits, and reach market saturation. Once there, these pop culture apps slowly shrink and die off, replaced by the next and best big little game. Consider Angry Birds if you have any doubt.
The secret to mobile games – much like Facebook – is interaction. The longer someone is on your site the more they provide action data, user information, and the ability to be marketed to. That’s why Facebook would pay a billion dollars for Instagram – constant user interaction.
What the Shorts Miss
Zynga currently chalks up around 50 million daily users and almost 240 million active monthly users. A number that dominates the competition, but down over the past few months. This is where the shorts will jump to tell us that Zynga gets the majority of their income through Facebook, and why it’s doomed to fail because users are, even now, starting to ‘Unfriend’ the social giant.
But what they are missing is that Zynga gets mobile while Facebook doesn’t.
Zynga’s applications are mobile, and they have proven to be successful at making money in mobile. I’ll repeat this while you put your mobile device down – Proven. Successful. At. Mobile.
It’s more than most companies can say in the mobile space; especially Facebook, and it’s the reason Zynga will be a strong long-term player in the mobile space.
Can they improve their returns in mobile? Absolutely. But making more money in mobile is easier than trying to make money in mobile. Ask Facebook.
The asset I’m most interested in isn’t Farmville, Cityville, Texas HoldEm or any of the other Zynga games with millions of daily users. As a long-term contrarian investor I’m more interested in the asset that doesn’t show up on any balance sheet.
Zynga’s Real Value
The real value in a company like Zynga is its ability to continually create the next game. They understand development cycles and their management gets the need to continually be producing the next big game.
Console games have development cycles measured in years. Zynga has pared the creation, mass production and dissemination of a game to months. They do this with talented people – Hundreds of designers, developers and programmers.
In the same way Microsoft (NASDAQ: MSFT) dominated the early development of desktop applications by hiring thousands of the best and brightest they could get their hands on, Zynga has been on a buying binge picking up these specialized employees.
Additionally, Zynga has been putting agreements together with third-party developers to publish their games and take a cut. It sounds like classic Rule Maker activity to me…
Most notably, EA has been making forays into some of the similar games that Zynga already has, but while its experience in console games is considerable, it’s late to the party like the rest of the competition and is playing catch up.
While I believe in timing the market, I don’t believe most investors are able to do it successfully. The most important thing is to be buying when others are fearful – Like now.
Currently the stock is under $4.50 and struggling to remain near the important $5 mark. We like that Zynga’s stock price has been beaten up recently, and that it might continue for a bit longer. It tells me we’ve got some opportunities to pick up this gaming leader at a pretty healthy discount.
AlexanderWissel has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and Microsoft. Motley Fool newsletter services recommend Amazon.com and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.