Will The Phoenix Rise Again?

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

In Ancient Mythology, there existed a bird called Phoenix. It had the ability to rise from its own ashes, after burning fiercely. The bird was considered to be immortal because of its ability to take a rebirth after such a ferocious death. Can we say Zynga Inc. (NASDAQ: ZNGA) is the Phoenix of the modern century?

 Why Zynga?

Zynga since its inception in the stock market has not performed up to the mark. The company went for an IPO listing in December 2011 at an initial price of $10. A lot was expected from the company as its originally soared especially because of its collaboration with the sovereign of social networking arena,  Facebook Inc. (NASDAQ: FB). The company did live up to its expectations during the first few months when it was at its all time high of around $13 or so. But then the epic fall started and is continuing till date. This may have been triggered by one wrong decision of acquiring OMGPOP at a humongous cost of $180 million. Since then the stock has fallen like “a slip on a greasy floor.” The shares currently trading around $3, are down by around 80% off its all time high.

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Investors have been losing hope because of many reasons. Some of them are:

Inappropriate Acquisitions: Zynga has invested around $230 million dollars since its listing in 2011 ($180 million for OMGPOP & $ 50 for Wild Needle). These investments have not been so fruitful for the company. This is quite visible with the continuous exit of the top management of OMGPOP and the reports showing that Zynga is unable to handle the user base of OMGPOP (Declining numbers).

Revenue Model: The entire model on which the revenue is generated has certain flaws. They have put a high concentration of the revenue on the virtual Zynga items. Rather than concentrating on advertising, which if used properly with its existing database can zoom up its revenue.

Facebook, the social networking giant, has been a major contributor for Zynga’s success. Facebook initially became quite popular amongst the people primarily because of its applications, one of which was Zynga. Many users bumped into Facebook to rescue there friends in Farmville. The picture is not the same anymore. These days online social networking has been rechristened as “Facebooking.”  Getting daily updates, gossiping, photsharing, Tagging friends, etc. have become so viral these days that gaming applications have lost their charm on Facebook.

Inexperienced Top Management: Mark Pincus, CEO of Zynga, undoubtedly comes with an experience that he can boast about. The problem is that, he has been more of a budding entrepreneur and lacks the vision of a CEO. This is probably the reason he is not been able to retain the talents acquired and give proper direction to his crew. He has also been accused of “Insider trading,” which is having a negative impact on the company's market value.

Allegations: Electronic Arts (NASDAQ: EA) has filed a lawsuit against Zynga, stating that the social game ‘The Ville’ is the copy of the famous 'The Sims' owned by EA. Which they are right to a certain extent for the ones who have played The Sims would understand better, like Creating a character, customizing its appearance, building a house, making the house nicer, making the simulated person happier etc. This is not helping Zynga at all in a market reputation that is already sinking.

Electronic Arts is an American developer, marketer, publisher and distributor of video games. In 2009 they acquired the London-based social gaming startup Playfish and have been competing with Zynga in the social gaming frontier. It is the second- largest social gaming company on Facebook. EA’s ranking had propped up especially because of the launch of The Sims in 2011. This is the very reason they are trying to protect the exclusivity of the game and have alleged Zynga for inappropriately copying their gaming sensation.

These are all signs of a company that is going down the drain. The top management is in reshuffle mode, the revenues have been declining and the new products aren’t that attractive anymore.

Then Why Do I Call it the Phoenix?

The company is in a state of burning into ashes, and it might be possible that they have to cry for a bailout in the future. But don’t give up on Zynga so soon! They are fighting hard to rebuild the trust of their investors by showing some signs of positivity.

Acquisition of “A Bit Lucky”: On Monday 17th September 2012, they made an announcement of acquiring A bit Lucky, a small game developer studio, at a decent price ranging between $20 – 25 million.  Yet another acquisition? Am I trying to contrast my own words?

If we take a deeper analysis into this acquisition, it is a bit different from its previous purchases. Here the purpose of acquiring is not to get any pre-existing database. Rather they are targeting a different segment altogether.  They have been dealing mainly with the casual gamers with games like Farmville, CityVille, Zynga Poker, etc. Here people spend a short span of time on gaming. But now they are slowly moving into the “mid core” segments. First they licensed the Unreal Engine in June 2012, after a few days itself they acquired the Buzz Monkey software, another multi-player gaming studio. Now despite the crisis situation, they made a bold move of acquiring A Bit Lucky.The company did show some signs of improvement in the last week or so, as the share prices improved by around 10 percent. 

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Zynga also responded to the lawsuit filed by Electronic Arts over The Ville. Zynga was a silent observer till now over the alleged lawsuit. This is not the picture anymore, as they have not only responded to the lawsuit, but also charged EA of violating anti-trust laws. Not only are they denying the existence of any similarity between the two games The ville and The Sims, they are also complaining that they have been getting baseless legal threats and attempts to prevent Zynga from hiring EA employees. A major strike back which was required as it was hurting their market reputation to a great extent.

This is quite similar to a Phoenix bird.  The bird builds a nest of twigs that then ignites where both the bird and the nest burns fiercely, reducing it to ashes. We can imagine this with Zynga. They have slowly been building the battle to launch these games to attract the new segment of audience. This will also help them reduce their dependency on Facebook to an extent, which they have already given hints publicly.

The big question is that can they survive the pressure of so many acquisitions? As already these acquisitions are coming back with lower returns and an exodus of top management.  Also, can this new sector give them the same returns? Will they be able to survive without the database of Facebook?

Compare and Contrast

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 related to the world's largest social network can be a blessing and a curse at the same time. You can learn everything you need to know about this company and whether they're a buy or a sell in The Motley Fool’s new premium research report. Don't even think about picking up shares before you read what the Fool’s top tech analyst has to say about Zynga. Click here to access your copy 


hemantnagla has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. 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.

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