Zynga Is Creating Ripples in the Gaming Market

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Back in the day, the tech investment cycle used to be predictable with the production of new technologies like TVs, processor chips, and even monitors that take some time to be introduced in the market, thus preparing competitors for the upcoming swing. However, tablets and mobile phones have changed the game, making the market movement unstable at some points. You could see that there is rise on one day and a sudden drop on another. Sometimes, even mere downloadables like apps create ripples in trading floors, discretely affecting others in the same industry.

How Zynga Sets the Sail and Steers the Wheel

Zynga (NASDAQ: ZNGA) is most popularly known for its games accessible on the internet through Facebook and other social networks and mobile platforms such as Apple iOS and Google Android. It is a California-based limited liability company organized in April 2007. Zynga has a market cap of $2.06 billion with shares trading at $2.63 with a P/E ratio of 130.50 and P/S ratio of 1.8. The company provides social game services to 240 million average active users in over 175 countries for free, generating revenue through in-game sales of virtual goods and advertising. In 2012, the company launched several new games, including Hidden Chronicles, Zynga Bingo, Scramble with Friends, Slingo, and Dream Heights. These games have become popular with players, spanning more than a number of genres.

Zynga’s growth has slowed since its IPO when it was an overnight social media success. The overexcitement during its IPO resulted in the stocks being overvalued. Hence, this recent decline, causing other investors to lament that Zynga is one of the worst IPO performers in recent history, resulted in the company restructuring and streamlining its operations to conform to the new reality.

What’s Good about Zynga?

Zynga spends in R&D to develop blockbuster new games. In 2012, 50% of its revenues were invested in R&D. In comparison, Acitivision Blizzard (NASDAQ: ATVI) which is 6.5 times bigger than Zynga’s value spends the same amount in R&D. Its leadership in the casual/mobile/ social gaming is brought by its extremely popular titles such as Farmville and Mafia Wars, known by so many who use the Internet, with 300 million active users throughout the world. This large user base is mainly the reason for the over enthusiastic response during the company’s IPO. With recent decline in sales however, the market has gone from over excitement to extreme pessimism.

Facing reality means restructuring the organization, cost cutting, and focusing on its core products. Zynga did this by cutting its workforce by 5% and taking down some of its games, saving $15-20 million in the process so that they can reallocate resources to their core areas. A serious intention to enter online gambling is in the works, which began when the company bought patents for online gambling and partnering with UK company Bwin to start online gambling in the UK. If they can move their users of Zynga Poker, which numbers in millions to real online gaming, then this could lead to the company’s revenues jumping significantly. This online gaming option is new and could shift the company’s stock price which is currently undervalued. Zynga has also partnered with cloud TV service provider Synacor (NASDAQ: SYNC) so that its games can be accessed directly by Synacor’s 24 million subscribers. Finding many ways to provide its games through more channels and platforms is Zynga’s aim and this partnership is a step towards that direction.

What’s Not so Good About Zynga?

Zynga is closely tied to Facebook and the biggest risk is how the company will perform if its attachment to the FB platform is cut off. In fact, one of the biggest reasons for Zynga’s recent stock price fall is its recent change in relations with Facebook. The company has also not discovered additional ways to make money out of its large user base and has not used advertising to maximize its revenues. Its source of revenue is still the selling of virtual objects to its users. The revenues from this virtual sale it has to share with technology giants in the use of their platforms because as a small player, developing their own internet platform is impossible.

Buy, Hold or Sell?

Zynga’s stock price is undervalued and insiders are buying shares for only one reason: they think it will go up. Zynga recently announced a repurchase program authorizing selling of up to $200 million of its outstanding stock is a seal that the company believes its shares are undervalued and are a nice bargain at current levels.

Some investors have a lot of confidence in Zynga that it can turn things around while other market watchers have not. Zynga, for their part, will give investors a clear view of where it stands and where they are planning to go come February 5 when its earnings will be known publicly. Until then, holding the position for now would be a good option.

RhodoraDagatan has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. 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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