Is it Game Over for Zynga?
Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Astonished, amazed, nonplussed and flabbergasted!!! Just a few words to describe the feeling Zynga (NASDAQ: ZNGA) gave its shareholders on July 26 when it posted a significantly worse second quarter result, which in turn sent the shorts on Wall Street on a feeding frenzy like a bunch of hungry piranhas.
The result was a steep 40% drop off the cliff for the stock to around $3 levels. But the destruction of shareholder wealth wasn’t just limited to that. Zynga’s stock price has been beaten down almost 70% since it went public last year. So what seems to be bugging Zynga? Lets take a closer look...
The Numbers
The company’s second quarter bookings clocked $302 million, which was way below analyst estimates pegged at $344 million. Zynga’s bottom line dipped into the red with a net loss of $22.8 million compared to a $1.4 million profit it made in the prior year period. The huge wipe-out being mainly on account of rising research and development expenses.
Moreover, Zynga made many analysts unhappy when it cut its annual bookings forecast to between $1.15 billion and $1.23 billion from a loftier range of $1.43 billion to $1.5 billion.
The company claims that this drop is temporary in nature. Seriously?
To me, this seems like a problem that's going to last for quite a while. And here's why:
Addicted to Facebook
First of all, Zynga’s enormous dependence on Facebook (NASDAQ: FB) for revenue has made it quite literally vulnerable to the whims and fancies of the social networking giant. Of late, Facebook made a few changes to its platform resulting in newer games from other developers being promoted more than those of Zynga’s. And with most of the company’s revenue originating from Facebook’s platform, the damage is understandable.
Gaming Fatigue and shift toward Mobile gaming
Then there is the growing incidence of what’s been termed as social gaming fatigue. The popular gaming title “Farmville,” which used to bring in as much as $80 million in the prior year quarter, shrunk to just $20 million. Many analysts are of the opinion that Zynga’s once high grossing titles are starting to lose favor because people don’t find them interesting anymore.
The slew of smartphones and tablet devices such as Apple’s (NASDAQ: AAPL) latest high resolution iPad, have now brought near console quality games to users at a low price and in some cases, even free of cost. The Quad core Google (NASDAQ: GOOG) Nexus tablet, which was released for a near throwaway price of just $200, features top notch hardware that can play high-quality, graphic-intensive games from Google’s Play store. So If I’m not mistaken, people would find a lot of mobile games more interesting than moving sheep and cows in a game of Farmville on their desktop PC.
But the shift toward mobile devices has not only been painful for Zynga. Facebook is also facing the heat from analysts and shareholders alike as it struggles to monetize a rising tide of mobile Facebook users who are not as remunerative as their desktop counterparts. The same can be said for Baidu, the Chinese search engine similar to Google, which recently released its second quarter results.
So what should we do about Zynga?
At the current market capitalization of around $2.4 billion, Zynga is valued very close to the $1.6 billion cash on its balance sheet -- which sort of shows that the bottom is near.
Nevertheless, even at a price of $3, I’d recommend staying away for a while because, if I’m not mistaken, another 150 million shares are about to expire from their lock-in next month, which could lead to yet another bloodbath.
Fundamentally, I see very little to cheer about Zynga, as its money spinning games wear out and its entry into the mobile arena proves woefully inadequate. As for its plans to enter the real money gambling space: It can only do so after regulatory approval and that too by 2013.
So what do you folks think about Zynga? Feel free to express yourself in the comments section below.
kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Baidu, Facebook, and Google. Motley Fool newsletter services recommend Apple, Baidu, Facebook, and Google. 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.
