It's Game On for These Companies

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

As a college student, I have seen what video games can do to a person's sociability, and more importantly, GPA. I would be lying to you if I said I don't like a little Madden or Call of Duty action from time to time, as most males my age do. Buying a new game can be exhilarating: the unknown stories and conflicts you will undoubtedly guide your virtual avatar through, the difficulty factor, and most importantly, the fun. Much like the newest games always coming out, there are several companies that deserve your attention. 

Baa...Zynga?

Zynga (NASDAQ: ZNGA) avoided what could have been a disaster. With its recent earnings report barely beating loss estimates, coupled with hundreds of layoffs looming, a huge management change and restructuring plan, the layman would run for cover and sell. However, there are a few glimmers of hope that tell me this company is poised for a turnaround and worth a second look.

Zynga posted an adjusted earnings per share loss of $0.01 on revenue of $231 million, beating analysts' expected net loss of approximately $0.04 per share on revenue of $185 million, according to its recent earnings report with a net loss of $16 million. The user base also took a hit showing the monthly active user, or MAU, count dropping to 187 million, down 39% year over year. Low or negative cash flows and an unstable stock price round out this grim outlook.

A silver lining?

Now, these stats and figures may scare you. However, there needs to be two thing taken into account before you write Zynga off as a product of the social gaming fad. There is a new CEO in town--replacing Mark Pincus is Microsoft's (NASDAQ: MSFT) Xbox guru Don Mattrick.

The man has also been named a "Top Ten Brilliant Technology Visionary" by CNNMoney, and one of the "Smartest People in Tech" by Fortune magazine. With this massive credibility and clout this move can help Zynga pull out of the nose dive. This recent earnings report accounts for the time before Mr. Mattrick took the helm, so you can't pin the negativity and losses on the leadership.

During Mr. Mattrick's time at Microsoft, as President of Interactive Entertainment in charge of the development and marketing of the console gaming giant, the Xbox, he is credited with spurring the growth of the Xbox 360 user base from 10 million users to 80 million, developing the sensation of the Kinect motion gaming system and growing the Xbox division into a $2.53 billion success story, a 53% increase from just a year ago.

In fact, the Entertainment and Devices division, which includes Skype, the Xbox One and the Windows smartphone has grown 8% just this last quarter alone and is Microsoft's best bet for continuing to grow into the next few decades. With Microsoft losing it's de facto dominance in the personal computing software market to Apple and other emerging mobile technologies, this division is more important than ever.

The Windows phone has failed to catch on with mobile consumers, with less than 3% of devices in the US market. However, in some emerging international markets, the market share jumps to around 20% of devices and has been projected to do the same domestically. It's console gaming needs a mobile compliment with the market moving towards more mobile gaming, Microsoft should be watching carefully if Zynga can pull this one off. If it does, all the pieces are there for Microsoft to build on, a platform with the Windows phone, the games with the Xbox and the financial clout of the company.

Zynga's Bottom Line

This change of command is Zynga's best hope for a turn around. Already implementing a $25 million cost reduction program and steering Zynga towards mobile gaming, a move that has payed off huge for the like of Facebook recently, Mr. Mattrick's leadership comes at a pivotal time. The other glimmer that Zynga needs to grasp is its recent venture into real money gaming. Zynga recently acquired Spooky Cool Labs, a social casino games provider and has started introducing its ZyngaPlus games in the UK. One downside to this new approach is Zynga has decided not to pursue a license for gaming in the US. 

With Mr. Mattrick at the helm, and his proven track record in both Xbox and Electronic Arts (NASDAQ: EA) , Zynga has a fighting chance to rebuild confidence in its user base and develop its future profit sources. Don't sell out just yet.

It's still in the game

If you're still not ready to delve into social gaming, take a gander at the aforementioned Electronic Arts. Electronic Arts is best known for its line of highly successful sports games franchises and console gaming, although it boasts an extensive portfolio of hundreds of successful games on a multitude of platforms. EA has a massive user base and has built a devout following, and its paying off.

EA has posted consistent returns on investment and has built its digital offerings, phased its expenses and opened up cash flow to reinvest in the company. EA's stock has grown over 120% in the past year with more room to grow. With a P/E ratio that's high but, similar to its competitors EA still is a buy.

EA's real strength is in its gaming portfolio. You can ask any gamer what franchises they play and can be almost 100% positive there is at least two EA titles in there. With such diversification in an otherwise saturated market, you can bet EA will continue to please the historically fickle consumers of video games.

The Foolish bottom line

Whether you are waiting in a midnight release line for the next Madden or have never touched a controller, these two gaming companies deserve to be looked at for their own reasons. Zynga, despite the doom and gloom surrounding it, has the potential to harness the leadership of a promising CEO, rebuild an ailing user base and develop its real money gaming ventures. EA can be your choice for a stable, established gaming company that has room to run yet and can deliver blockbuster titles year after year. For me, its game on for these two stocks.

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Jacob Norte has stock in Zynga Inc. 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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