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Zynga Inc (ZNGA)’s Transition Year: Is It Going in the Right Direction?

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Zynga Inc (NASDAQ:ZNGA)In the final week of June, Zynga Inc (NASDAQ:ZNGA) announced that another key member of the organization, Andy Tian, the head of its Beijing game studio, was leaving the company. As a result, shares dropped by nearly 7%, touching a five month low. But then, it announced the arrival of Don Mattrick and its stock rallied. The company is moving forward in its “year of transition” that now includes a leadership change, in addition to cost-cutting measures and the strategic shift from developing only casual games.

King of console gaming

In the beginning of July, Zynga Inc (NASDAQ:ZNGA) revealed that its founder and CEO, Mark Pincus, is stepping aside. He will be replaced by Don Mattrick, an Electronic Arts Inc. (NASDAQ:EA) veteran and the head of Microsoft Corporation (NASDAQ:MSFT)’s Xbox unit, who will steer the struggling game developer out of the crisis. Mark Pincus’s departure hasn’t surprised anyone, as he wasn’t shareholders’ or employees’ favorite. Moreover, the company’s performance, particularly the previous results reported in April when its sales plunged by 30%, expedited Pincus’s exit.

Meanwhile, Electronic Arts Inc. (NASDAQ:EA), or EA, which has risen by an astonishing 71% this year, is not looking so good. Its results are due out soon, and it doesn’t have a permanent CEO. The company, due to its habit of giving aggressive guidance, could very well post another earnings miss after twice missing estimates earlier this year. The industry as a whole is moving away from consoles, and although EA has made good progress in mobile and handheld devices, it still earns more than 80% of its revenue from console games. To make matters worse, the NCAA recently announced that it won’t renew its license with Electronic Arts Inc. (NASDAQ:EA), which means that NCAA Football 2014 will be the final series title from EA. Its stock is trading at near 52-week highs, and with the earnings announcement approaching I would recommend staying away from Electronic Arts at the moment.

On the other hand, Zynga Inc (NASDAQ:ZNGA)’s new CEO, Mattrick, has transformed the Xbox into a console industry leader, is accredited with the impressive growth of Xbox Live, and is also the brains behind popular franchises such as Need for Speed, FIFA and The Sims. He has extensive experience in the three key areas: hardware, software, and networking. For Zynga Inc (NASDAQ:ZNGA), I believe this was a big step in the right direction after reporting a number of high profile departures. The news received shareholder’s approval, which was evident in the 10.4% rise in its stock on July 1.

But, why has Mattrick left Microsoft to take control of a struggling game developer? A flurry of articles on the internet have discussed this issue, but I believe there are two primary reasons for this. The first has to do with Microsoft’s current reorganization plans, in which Mattrick, despite his glittering achievements, couldn’t get a bigger role in the organization. This was reported by Fast Company in an interesting article about Mattrick. The second has to do with Zynga Inc (NASDAQ:ZNGA), which is seen as a “sinking ship” by some industry experts. As highlighted by tech analyst, Farhad Manjoo, if Mattrick is able to turn Zynga around, or even bring some stability to its top and bottom lines, then that would be the biggest accolade on his already impressive resume. If he fails, then he won’t be blamed as the ship was already sinking.

However, I’m more optimistic about Zynga Inc (NASDAQ:ZNGA)’s future now than I was before. With Mattrick onboard, Zynga will move more swiftly toward mid-core games, mobile games, and real-money gaming, while retaining customers at Facebook Inc (NASDAQ:FB). I believe that if there is one person who could do that, it’s Don Mattrick. After all, he did a similar thing at Microsoft by adding millions of additional subscribers to Xbox Live without making compromises on the growth of Xbox.

However, with Facebook Inc (NASDAQ:FB), my current cause of concern is the brain drain (which Zynga is all too familiar with), as some of its biggest and most experienced leaders are leaving the company for other opportunities. The latest one to go is 7-year veteran, North American sales chief Tom Arrix. The company earns less than half of its total revenue from North America. His exit comes after the departures of EMEA director, Christian Hernandez, the famed ad product chief, and the “Godfather” of Google’s Adsense, Gokul Rajaram, along with engineering director, Josh Wiseman. The company is now pushing toward increasing ad revenue, and it could introduce video ads as well as Instagram ads in the near future. However, it has to meet the delicate balance between enhancing revenue streams without disrupting the user experience. At current price levels, there is room for improvement, and I believe that the stock is going to cross $30 in the near future. But, there is no significant upside here, and the stock has lagged far behind the S&P-500, so I’d rather stay on the sidelines with Facebook Inc (NASDAQ:FB).

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