Will Zynga's Latest Plan Make or Break the Company?

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Once upon a time, it seemed like Zynga (NASDAQ: ZNGA) was all but printing money. Stumbling on to a successful formula for social gaming success, the company seemed ready to take on the world with what was expected to be a wildly successful IPO. Things don't always work out as planned, however. It now seems like every bit of news about the company has at least some people wondering whether it's going to be Zynga's last.

The big news is that Zynga recently laid off 520 people, cutting approximately one-fifth of its workforce and reducing its staff to 2,300. Rumors began about the layoffs at the end of May. When they became official, people were worked into enough of a frenzy that trading of the company's stock had to be temporarily suspended. Add this to a questionable new direction for the company, and it's easy to understand why people are wary of Zynga's stock.

Not-so-social gaming

Zynga originally made a name for itself by developing social games for Facebook. Some users disliked the excessive number of requests that they had to send to friends to complete quests in the games, but the company still did quite well for itself as a result of microtransactions for in-game currency and items. Unfortunately for Zynga, its competition started heating up and user numbers started to dwindle.

Zynga tried its luck at creating its own social gaming network, independent of Facebook. Meanwhile, major game publishers such as Electronic Arts (NASDAQ: EA) started taking an interest in social gaming in hopes of capitalizing on the trend. EA has the advantage of being able to adapt games that social gamers already know and love, especially now that it owns the casual game giant PopCap. While Zynga tries to come up with new variations on the same concepts to keep its fans happy, EA is giving them the option of playing Bejeweled, Zuma, and Plants vs. Zombies on Facebook.

Taking a gamble

With its break from Facebook not going as well as it had hoped, Zynga is looking for new avenues that it can monetize. Apparently, the best option available is to make a transition to online gambling. This isn't necessarily a huge stretch since the company already has a few casino games available. But this time around, the players won't have to send requests for more chips to everyone on Facebook.

The problem with this is that Zynga's potential market is relatively small at the moment. The company plans to launch online gambling games in the UK, hoping that the trend toward online gambling legalization in the US continues. Zynga wants to get in on the ground floor.

This "hurry up and wait" approach may not serve the company well, however. Zynga's already making significant cuts to its workforce, and it may not have the time to wait for online gambling to expand in hopes of becoming a major player in the emerging industry.

Established competition

The big problem with the move into online gambling  is that Zynga won't be the big dog in the fight.

With Facebook, Zynga enjoyed being one of the largest game developers on the site. It was all but ensured millions of  loyal players every time it released a new game. With online gambling, it will face competition from well-established companies in the gambling field, such as MGM International (NYSE: MGM).

MGM already has some experience in online gaming, developing a social game in 2011 as a means of increasing interest in its casino properties. It has already partnered with Bwin.Party to develop an online gambling presence as well. MGM also has an advantage in having established casinos in Nevada, the first state to legalize online gambling in the US; according to Nevada law, any company offering online gambling services must also have a physical presence in the state before it can use real money in games.

MGM isn't the only competition that Zynga will face, either. Other major casino operators such as Boyd Gaming and Caesars Entertainment are also making moves into the online arena. With both name recognition and well-known brands (such as Caesars' "World Series of Poker" brand), it will be hard for Zynga to really break out on its own in the field. And unless a federal law legalizing online gambling is passed, Zynga may well have to partner with one of these companies just to be able to enter the field at all... assuming that the company has anything to offer that the casinos can't get elsewhere.

The bottom line

It's possible that online gambling could be a major book for Zynga, but for now it's just not worth betting on. Despite cutting costs through layoffs and launching sequels to popular games including "Draw Something," the company isn't in a good place right now and doesn't appear overly stable. Zynga has enough cash to keep itself afloat for now, and it might even manage to turn things around in the future. But I wouldn't recommend investing in it, since even with its current low price point ($2.79 per share as of this writing) there isn't much at the moment to indicate that it will see significant recovery.

Zynga's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this newly public company. Being so closely tied to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about Zynga and whether it's a buy or a sell in our new premium research report. Don't even think about picking up shares before you read what our top analysts have to say about Zynga. Click here to access your copy.

John Casteele has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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