Why My Hopes for this Company are Fading Fast

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

Looks like the chips are finally down for social game maker Zynga (NASDAQ: ZNGA). As shares continue their sustained downward plunge, executives are leaving in droves amidst lowered employee morale, and most importantly, consumers have simply started losing interest in the one-time hit games.

This is company has failed on two main points – it hasn’t created more innovative games to retain and expand its target audience, and it has not done much to break free of its over-dependence on Facebook (NASDAQ: FB). The results: slashed bookings forecast for the full year and a near 77% drop in share prices from its initial IPO price of $10.

At the same time, what really bothers me (and probably a lot of investors as well) is the distinct lack of vision of Zynga’s management. The much-touted $180-million acquisition of OMGPop, at a time when the latter had just tasted success with ‘Draw Something’, was a hasty move to say the least. As with most other games, Draw Something turned out to be nothing but a passing fad and fans quickly lost interest and moved on. And now the nearly $95 million worth of impairment charges related to the acquisition are just making the whole fiasco much more painful for Zynga.

Zynga has also been facing a bad patch in its current relationship with Facebook, which becomes alarming considering the fact that most of its revenue is generated through sale of virtual goods that are featured in online games played on the social networking site. This again is the primary reason why the current 19% fall in Zynga’s share prices have also dragged down Facebook’s stock prices by 1.8%. After all, around a tenth of Facebook’s revenues are linked to fees derived from Zynga.

But then, Facebook has been able to move on with minor scratches, probably because of its huge user base of around 1 billion. But as for Zynga, the fact that some recent changes in Facebook’s user interface actually seem to have made it harder to locate games on the social networking site, have made the company’s job much more difficult.

New games aren’t doing very well either. Although ‘Farmville 2,’ the sequel to the original smash hit ‘Farmville,’ has managed around 6.6 million Daily Active Users (DAU) recently. That figure is truly peanuts compared to the tens of millions who used to log in just to play the older version during its peak period, according to AppData, a firm tracking Facebook in-app usage. In fact, everybody knows that if ‘Farmville 2’ fails, it’s going to be the death knell of Zynga.

But as I said, the problem really lies in the fact that Zynga’s merely updating its games, not inventing any new  ones. After all, this is a company that has never really done much apart from blatantly imitating hit games of rival companies. The recent lawsuit filed by Electronic Arts (NASDAQ: EA) stating that Zynga lifted key elements from the former’s popular ‘The Sims Social’ game in order to build up its own ‘The Ville’ game is proof enough of this fact.

Not that Zynga isn’t doing anything about all this. The company recently took over a studio named ‘A Bit Lucky’ in an obvious attempt to cater to the mid-core gaming segment, which supposedly has a larger audience reach. At the same time, the company is increasingly focusing on games akin to the ‘Mafia Wars’ that provide instant gratification, as opposed to the more long-time rewards embedded in games such as ‘Cityville.’ But then, only time will spell out the viability of such a move. However, till then, it’s better to steer clear of this stock, at least till the next two quarters. Fool on!    

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subhadeeptech has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. 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.

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