Zynga's not out of the game yet
The company must deal with falling stock value, competition on the social gaming and mobile gaming fronts, and decoupling from Facebook.
The maker of "FarmVille," "Mafia Wars" and "Words With Friends" was the king of wasting time at your desk. Its biggest good luck charm was Facebook (FB), since many Zynga games appeared on the site. The meteoric rise of Mark Zuckerberg's online garden party gave Zynga CEO Mark Pincus' company a whole new level of success.
The two companies became integral to each other's well being and growth. They were each other's best source of revenue. In-game transactions of online goods brought in revenue for all involved.
But the Facebook initial public offering showed how much the company was overvalued. Now that Facebook's growth has slowed down, Zynga faces an uncertain future.
The number of players for Zynga's games has steadily decreased for months. One theory from Cowen analyst Doug Creutz is that the move from PCs to mobile devices has shrunk Zynga's active user numbers.
When more people use their tablets and smartphones in place of computers, Zynga loses gamers. The company’s attempts to enter mobile gaming haven't done much good and appear somewhat desperate.
On Tuesday, the day of Creutz's report, Zynga’s stock triggered the short-selling circuit breakers at Nasdaq when it fell 13% to below $5. That drop was nothing new: On the day of Facebook's disastrous initial public offering, Zynga's stock fell roughly 15%. Zynga's has lost $5 billion of the $9 billion it was valued at in its initial public offering.
This is not to say that Zynga doesn't trade well. It trades at 18.3 times forward earnings, while traditional video game competitor Activision Blizzard (ATVI) trades at 11.7 times and Electronic Arts (EA) trades at 11.3 times.
So is Zynga worth the trouble? The company is trying to branch out, but it might be too late.
Currently, Zynga has competition on the social gaming and mobile gaming fronts. Even though "FarmVille" and "CityVille" rule the Facebook-based simulation market, they can always be replaced by the next big thing.
Electronic Arts will be releasing a new SimCity installment, "SimCity Social," for free on Facebook later in June. SimCity is a big franchise for EA, having launched a long-running video game series and a slew of successful spinoffs, including "The Sims." With a recognizable name in video games and a good reputation for the series, SimCity Social will probably give Zynga’s micromanaging games a run for their money.
In March, Zynga acquired mobile game developer OMGPop for $200 million. The move came after the massively popular iOS and Andriod game "Draw Something" beat Zynga’s own "Words With Friends" in sales. Buying OMGPop was a good investment for Zynga as it added a whole new team of developers versed in the game market. Plus there is a "Draw Something" television game show in the works and the company is also partnering with Chinese social network Weibo (SINA) to make a Chinese language version of the game for the site.
Another problem is the company’s reliance on Facebook as a business model. To correct that, Zynga created its own gaming platform at Zynga.com. It is looking to find new revenue streams outside of social media, possibly with online gambling. This would bring in a new set of partners for Zynga to do business with, including casinos. At least Zynga recognizes the need to not be fully dependent on Facebook to draw in new gamers.
However, the general feeling is that Zynga is not a good investment. Dave Their of Forbes is concerned that the company is relying too heavily on its old hits and hasn't made a good game to take up the challenge. Either be the hit maker, or be the publisher and platform for these types of games. Zynga's performance has even made some question how mobile game companies will do at offering, including "Angry Birds" developer Rovio.
But keep in mind that speculative stocks have gone through the wringer since their peak in April and some market players have renewed optimism for the category. Also, Internet IPOs have generally underperformed. Some people are just generally concerned with investing in gaming companies and new media. Plus, Facebook could have a big quarter and that might support Zynga. Overall, the stock is performing at the level of most video game companies right now.
On Friday, shares of Zynga’s went up 11%. Monday, the stock closed up nearly 4% to $5.78. Analyst Heath Terry of Goldman Sachs said that a price of $5.50 per share doesn’t truly represent Zynga’s prospective growth. Goldman finds Zynga’s risk/reward enticing and feels that new product announcements in the second quarter ought to help.
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These hot movers could rise by double digits in coming months.
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