End of the Gaming Era?
indar kumar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The gaming industry is in trouble. The unexpected quarterly results of the past weeks have led to big moves in the share prices of various companies such as Electronic Arts and ZYNGA.
At present the market for gaming industry is not very lucrative and doesn’t seem to improve either. In such an environment what lies ahead for these gaming companies?
Tough Times
ZYNGA (NASDAQ: ZNGA), before Facebook, was being blamed for the world’s most disappointing IPO. The company announced its IPO in December last year, pricing its shares at $10 a pop and raising $1 billion. However the stock nosedived on the very first day and is currently trading at the $3 mark. It is a case of “Irrational Exuberance”. The stock was priced at the higher end of its band and the company was valued at $7 billion making it twice as big as its Competitor Electronic Arts (NASDAQ: EA)
EA commands a market capitalization of $4.1 billion. Electronic Arts' lineup for the upcoming year is poor, and at the same time the company is withering away its cash. The statements and loses reported in the latest quarterly report was also a cause of worry. The most worrying thing though is that inspite of these poor reports EA hasn’t geared up. It has played the cards too early and has shown the public what to expect in the next 2 years which leaves us with no expectations. This can hurt the company’s stock prices even more.
What’s Wrong?
For ZYNGA, apart from the overpriced IPO there are several issues which has brought its shares further down. The reasons could be interpreted through the reports of Matt Doiron from Insider Monkey: According to him, there will be a “write-down” of the acquisition of OMGPop with the estimate of $90M, the Q3 2012 EPS would be in the range of zero to a loss of one cent and the bookings for the full year will be cut by $100M. If this wasn’t enough share prices of ZYNGA went into further pressure when Baird downgraded it to neutral, citing concerns over the "magnitude" of the forecast cut. Also, the CEO Mark Pincus is in controversies and is blamed for the bad stock performance and the mismanagement.
EA on the other hand is struggling with all three platforms it functions in, namely – mobile, P.C. / Play station and online. In the last earnings call no substantial revenues was given by the mobile platform, only6%-8% earnings are mobile generated. Origin (the division for P.C and play station) isn’t performing upto the mark and to make matters worse the online subscription games are losing customer base. Subscriber numbers are dwindling on the "Star Wars" MMO (a massively multiplayer online game), going from 1.7 million down to 1.3 million. The worst thing is that the measured date of those numbers is unclear, and gamers are reporting wasteland servers – according to SWTOR community.
The future
ZYNGA’s stock is down more than 70 percent from its IPO price. So definitely it’s not the time to invest in the company. With no concrete plans from ZYNGA, it is better to stay away from the stock until management comes up with more significant monetization plans. However if you already have it, then it would be wiser to hold it and see what strategies does the management makes to turn around their fortunes.
As for EA it is dwelling the glory of old and paralyzed franchisees like – N.F.S, Madden and Sims. The upcoming games are too weak to generate sufficient profits. Hence short position is recommended given the risks.
Compare and Contrast
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