Is Zynga’s Bet on Mass Market Gambling a Game Changer?

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

Zynga (NASDAQ: ZNGA) reiterated its intention to focus on mass market gambling, prompting a series of questions on the company’s future with regard to hardcore gambling. Zynga CEO Mark Pincus quashed allegations, which had suggested that the company could be trying to cash in on the existing hardcore gambling market following its foray into online gambling in the UK. Zynga seeks to focus on its strength, that is, making gambling social. Zynga has experience in social gaming, an attribute that if married to gambling, could trigger a massive upside in online engagement for the company.

Doors opening for monetization of online gambling

The long-term obstacle to online gambling has been turning electronic money into real cash. Companies are only allowed to account for money received from gambling electronically in the US, but this standard seems to be changing. The state of Nevada hurriedly signed into law a bill allowing for the monetization of online gambling, beating New Jersey to become the first state to allow the practice.

According to recent reports, mobile games maker Glu Mobile (NASDAQ: GLUU) became one of the earliest beneficiaries of the new rule. Glu Mobile designs, markets, and sells mobile games worldwide. It develops original games based on its intellectual property comprising Big Time Gangsta, Blood & Glory, and Bug Village, among others.

Zynga has already taken a huge step towards this course after David Ko, COO, announced during the conference call that the company expects to report its first real-money gaming products by end of the first half of 2013. He also revealed that the company had already filed for a license to offer gambling services in Nevada, back in December 2012. This could be a crucial turning point for a stock that has been under pressure for the greater part of the last 13 months.

Zynga’s shares fell nearly 80% in 2012, but were up 15% on Monday, following the announcement. Glu Mobile shares also shot up 6.4% to follow up on the rise on Feb. 22, of 6.3%.

Zynga is the master of social gaming and looks to capitalize on its experience in order to trigger a paradigm shift in the way online gambling is done. Pincus said, during a Morgan Stanley conference in San Francisco on Feb. 25, “It makes it more exciting than when you are by yourself in an anonymous poker room. We're not the company to win the hardcore real-money gamers, but we think we are for the mass market audience." Zynga started making inroads to the real-money gambling arena last year when it announced a deal with the UK-based poker company Bwin.

A look at Zynga’s main challengers

Zynga faces competition from Electronic Arts (NASDAQ: EA), a company that develops, markets, publishes, and distributes game software content and services for video game consoles, personal computers, mobile phones, tablets and electronic readers, as well as the Internet, Zynga’s main revenue source.

Electronic Arts’ stock recently hit a new 52-week high following optimism by analysts from Macquarie Capital. The company’s stock was upgraded by Ben Schachter from market perform to outperform, citing focus on cost controls and optimization of infrastructure for the new console cycle and digital opportunities.

Electronic Arts boasts a trailing 12-month revenue of $5.34 billion compared to Zynga’s $2.58 billion. Net income for the same period stood at $175 million for the Redwood City-based company, compared to a loss of $209 million for Zynga. Nonetheless, Zynga trumps Electronic Arts in terms of gross margins, with 0.73% compared to EA’s 0.64%.

Glu Mobile may not be regarded as a direct competitor to Zynga, but according to the shift in device preference, Zynga could yet again find it tough to rival the more seasoned mobile player. Glu Mobile stands a chance, based on the current shift from desktop usage to mobile device usage. The introduction of tablets and smartphones to the computing world has revolutionized entertainment as app-based games are becoming more popular than web-based games.

The bottom line

Zynga has been in the gaming business for the last five years, going through its worst experience last year. However, the news of monetizing online gaming and gambling offers the company another opportunity to express its authority in social gaming. The biggest question is, however, whether the company can successfully conjure a rebound with its new bet, not forgetting the threat posed by Electronic Arts and Glu Mobile.

Nmaithya 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!

blog comments powered by Disqus