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Is it time to avoid or buy Zynga (NASDAQ: ZNGA)?

Some might be tempted to look at Zynga’s share price, which is down over 77% since its IPO at the end of last year, and think that now is an ideal time to buy this internet company on the cheap. Don’t be fooled. While a depressed stock price can signal an investment opportunity there are significant downsides to Zynga right now which you might want to consider.

The company launched itself into existence on Facebook with the game Farmville. It garnered about 80 million monthly active users at one point, but has now lost roughly 75% of its user base.

Zynga relies heavily on Facebook (NASDAQ: FB) to provide a platform through which to offer its games. This leaves Zynga at the mercy of Facebook, since tweaks to the social gaming system have instant ramifications for Zynga.

Zynga paid $186 million to buy the creator of the mobile app “Draw Something,” only to see the user base evaporate almost immediately after purchasing it. When Zynga purchased it there were 15 million daily active users. That number is now under 2 million.

The leadership structure at Zynga has evaporated. Since July executives at all levels have moved out, everyone from the chief creative officer, to the chief technology officer of infrastructure, to the CFO, to the treasurer. Such a mass exodus is a sign of disappointment with the company’s performance.

And finally, Zynga posted a third quarter loss of almost $53 million. 

So, with all these negative factors, is this a company to avoid? I think not. 

Zynga let go about 5% of the workforce and CEO Mark Pincus has been changing his management style to be more involved with product meetings and delegate more tasks to other executives. These are all good internal structural changes. 

The third quarter loss is attributed to a $95 million dollar write down resulting from the purchase of the company that created “Draw Something.”

But the real key to success with Zynga is whether it can consistently create new games that garner large numbers of active users. Zynga seems able to do that. About two months ago they launched Farmville 2 which has garnered 8.3 million daily active users, making it the most popular game currently in the Zynga library. Sure it is a newer version of their old successful theme. But what does it matter as long as people enjoy it and use it.

Additionally, the Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) mobile app platforms have given Zynga an additional avenue through which to promote its games. Some of the top games available on the Apple and Google app stores are now made by Zynga. 

As of November 19, three of the top 150 paid iPhone apps in the Apple store are made by Zynga. The game “Words with Friends” is currently number 19 in the list of free games on the Google app store.

Apart from Zynga’s debacle of purchasing the creators of “Draw Something”, Zynga has done well transitioning into the mobile app space. Its’ “Texas HoldEm Poker” and “Words with Friends” games each have 6 million daily users. These games might not be downloaded as much as some other games in the app stores, but the games consistently have a large, active user base. 

Zynga is going through some challenges right now and its stock price is reflecting that, but I think Zynga has the potential to grow significantly based on its ability to consistently churn out appealing games both on Facebook and in the Apple and Google app stores. 

This stock is a buy.

 


SeanMSullivan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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