2 Reasons to Avoid Zynga, 2 Companies to Buy

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The bounce in shares of Zynga (NASDAQ: ZNGA) might be over. After paying an outrageous amount of money for a Microsoft executive and getting surpassed as the biggest game developer on Facebook by King.com, it appears that investors might want to take profit in Zynga. 

Zynga is up 45% in 2013: 

<img alt="" src="http://media.ycharts.com/charts/0f989c835e5cfcb1ffd3563c983393e1.png" />

ZNGA data by YCharts

Investor sentiment about Zynga switched to bullish when the company said it hired Don Mattrick, a former Microsoft executive who was the boss for Xbox. The new CEO will be paid $5 million for the next 5 years, and the stock awards total $40 million. The total compensation will be $95 million, if all performance targets are met, though 8.9 million in restricted stock is not vested until July 2016.

No real change in leadership

The newly formed Executive Committee was approved by the board, according to the SEC filing on June 27, 2013. The committee, which is comprised of Mattrick and Pincus, Zynga’s founder, “will serve to manage the operations and affairs of the Company between Board meetings, and will report to the full Board.”

Dominance on Facebook lost

AppData reported that for the month ending July 6, 2013, Zynga lost its lead as the most popular game developer on Facebook to King.

<table> <thead> <tr><th> <p><strong>#</strong></p> </th><th> <p><strong>App Name</strong></p> </th><th> <p><strong>Monthly Active Users</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>1</p> </td> <td> <p>King</p> </td> <td> <p>150,251,400</p> </td> </tr> <tr> <td> <p>2</p> </td> <td> <p>Zynga</p> </td> <td> <p>147,687,743</p> </td> </tr> <tr> <td> <p>3</p> </td> <td> <p>Microsoft</p> </td> <td> <p>71,418,060</p> </td> </tr> </tbody> </table>

Data Source: AppData

King is the maker of Candy Crush Saga, and is number one on Facebook. Zynga’s FarmVille 2 is a distant 4th place, trailing Candy Crush by 14 million Monthly Average Users (MAUs):

<table> <thead> <tr><th> <p><strong>#</strong></p> </th><th> <p><strong>App Name</strong></p> </th><th> <p><strong>MAU</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>1</p> </td> <td> <p>Candy Crush Saga</p> </td> <td> <p>45,541,052</p> </td> </tr> <tr> <td> <p>2</p> </td> <td> <p>TripAdvisor™</p> </td> <td> <p>40,269,431</p> </td> </tr> <tr> <td> <p>3</p> </td> <td> <p>Criminal Case</p> </td> <td> <p>34,637,861</p> </td> </tr> <tr> <td> <p>4</p> </td> <td> <p>FarmVille 2</p> </td> <td> <p>31,658,976</p> </td> </tr> </tbody> </table>

Data Source: AppData

Alternative investments

Investors taking profits in Zynga might want to consider mobile game makers like Gluu Mobile (NASDAQ: GLUU). Gluu rose 11% recently after investors speculated that the $17 million revenue guidance will prove to be beatable. 3 of Gluu’s games are on the top 30 list of iOS games in China.

<img alt="" src="http://media.ycharts.com/charts/534193583de311e00d5aed0eec7fe99a.png" />

ZNGA data by YCharts

In March, insider buying picked up. In fact, in the last 12 months, insider buying exceeded selling:

<table> <thead> <tr><th> <p><strong>Type</strong></p> </th><th> <p><strong>Last 12 Mo.</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Total Shares Traded:</p> </td> <td> <p>5,976,967</p> </td> </tr> <tr> <td> <p><strong>Number of Shares Bought:</strong></p> </td> <td> <p><strong>3,338,127</strong></p> </td> </tr> <tr> <td> <p><strong>Number of Shares Sold:</strong></p> </td> <td> <p><strong>2,638,840</strong></p> </td> </tr> </tbody> </table>

Source: Nasdaq.com

Bearishness is also very high. The short float is 25.1% as of June 14, 2013.

Another software game maker to consider is Take-Two Interactive Software (NASDAQ: TTWO).  In June, Apple said that game controllers would be allowed to interact with Apple devices. Take-Two would benefit if demand for mobile games increase. In particular, strategy games like Ace Patrol would see an increase in sales. The Grand Theft Auto III title, remade for mobile, would also benefit from a game controller for Apple.

In May, Take-Two sold $250 million in convertible senior notes, which are due in 2018. The financing will be used partly to refinance another debt due next year. The company is set to report quarterly earnings on July 30, 2013 after the market closes.

Foolish Bottom Line

Investors are too optimistic that Zynga's downtrend is reversing. The company reduced headcount, only to use the funds for executive compensation. There are other opportunities to look at. The demand for mobile devices is not slowing down enough for mobile game makers to worry. Investors could start a position in companies like Take-Two and Gluu Mobile instead--both companies give exposure to investors for mobile games.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Chris Lau has no position in any stocks mentioned. The Motley Fool recommends Take-Two Interactive . 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus