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Don Mattrick Doesn’t Make Zynga Inc (ZNGA) a Buy

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Zynga Inc (NASDAQ:ZNGA) shares have been on a tear in recent sessions, rallying 23% in just three days. The company’s decision to hire Don Mattrick as CEO has been the primary catalyst behind the move.

While the decision to go with Mattrick might give the company a chance to move forward in a different direction, it does not alone solve Zynga Inc (NASDAQ:ZNGA)’s problems. Unless Mattrick can articulate a reasonable turnaround strategy, investors should stay away.


Don Mattrick is a great hire

Most agree that Mattrick is well qualified to lead a gaming company. He has been at Microsoft Corporation (NASDAQ:MSFT) since 2007, mostly responsible for the Xbox brand. He’s credited with growing the Xbox’s market dominance and getting the Kinect to market — one of the only successful video game add-ons in the history of the industry.

Prior to Microsoft Corporation (NASDAQ:MSFT), he held a variety of positions at Electronic Arts Inc. (NASDAQ:EA). In fact, in an interview with Bloomberg, Wedbush’s Michael Pachter said that he was expecting Electronic Arts Inc. (NASDAQ:EA) to consider Mattrick for the company’s CEO position.

What happened to the real money gambling?

Mattrick’s video game resume is impeccable, but his hiring seems to weaken a favored argument among Zynga Inc (NASDAQ:ZNGA) bulls — what happened to Zynga’s shift towards real money gaming?

With Zynga Inc (NASDAQ:ZNGA)’s bread and butter social gaming model in a state of crisis, some had argued that the company was well positioned to capitalize on the coming legalization of online gambling in the US.

So far, three US states have legalized online gambling (Nevada, Delaware, New Jersey) and it’s believed that, in time, most of of the other states would as well. Given Zynga Inc (NASDAQ:ZNGA)’s expertise in creating simple, web-based games, and the popularity of Zynga Poker, the social gaming company has been seen as a play on online gambling. Moreover, Zynga hired Maytal Olsha last August — a former executive at a UK-based online gambling company.

After Nevada legalized online gambling in February, Zynga Inc (NASDAQ:ZNGA) shares spiked. But Mattrick is a video game guy, not a gambling veteran. While his hiring certainly doesn’t preclude a foray into online gambling, it suggests that gambling won’t be so important to Zynga’s future after all.

That could be a good thing — at this point, legalized online gambling is far from certain. But anyone holding Zynga shares based on online gambling alone might wish to rethink their position.

The problems with social gaming

Mattrick’s hire, then, suggests that Zynga will stick to its gaming roots — but that’s the problem. To date, Zynga has struggled to turn a profit, and if it sticks to social gaming, it might never.

Social games are inherently prone to fads. They can emerge from nowhere, and like a pandemic, attract a massive user base seemingly overnight. But their shallow gameplay and viral nature means that they can lose their user base just as quickly as they acquired it.

The classic example is Draw Something, which garnered 35 million downloads in less than two months. Zynga bought the game’s parent company, OMGPOP, for nearly $200 million — only to see the game’s user base collapse shortly thereafter.

Blowing millions chasing the next viral hit doesn’t seem like the best strategy for a gaming company. Mattrick’s former company, Electronic Arts Inc. (NASDAQ:EA), decided to back out from the social gaming space back in April, shutting down three of its Facebook Inc (NASDAQ:FB) games.

Mobile vs social gaming

Many investors might not understand the difference between mobile and social gaming. Although there’s a fair overlap, the two are distinct spheres within the gaming world.

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