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Zynga Inc (ZNGA): An Analysis Of The Business

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The price of Zynga saw a sudden rally in 2013 due to the increased optimism surrounding its real money gaming initiatives. Zynga’s business model is in transition, as the company is trying to broaden its revenue base significantly by tapping into these more profitable business opportunities. Here’s a deeper breakdown of Zynga Inc (NASDAQ:ZNGA)’s new possibilities in the form of a SWOT Analysis.

Strengths

Zynga IncSticky User Base: Zynga Inc (NASDAQ:ZNGA) has a huge number of sticky users. The company’s user base of 298 million users is spending a lot of time on its platform. The ‘Freemium’ business model has worked as a good bait to add more customers and enhance the company’s brand value and positioned it as a leading gaming platform on a social setting.

Partnership with bwin.party: Zynga Inc (NASDAQ:ZNGA)’s partnership with a top real money gaming company, bwin.party is a major positive for the company. The company just unveiled its first offerings of games in the United Kingdom on the web and as well as a downloadable format. This foray into online gambling marks a strong upside potential for the company and also diversifies Zynga’s revenue base of making money mostly from online social games.

Reduced Dependence on Facebook: Zynga Inc (NASDAQ:ZNGA) doesn’t have to pay revenue sharing fees for gaming in non-Facebook platforms anymore. After building its user base, Zynga’s altered contract with Facebook Inc (NASDAQ:FB) will allow it to keep the 30% fees that it had to previously share with Facebook even for gaming payments received on non-Facebook platforms. Revenue bookings from Facebook made up the lion’s share of Zynga’s revenues and going forward, this should decline substantially.

Mobile Usage and Monetization: Zynga has managed to its grow presence on mobile rapidly with active users on mobile growing 75% on a Y/Y basis and ended 2012 with 72 million MAUs. And monetization on mobile is stellar as well with sizable revenue bookings on mobile which represents 21% of total bookings in Q4 2012. Zynga is also the 5th largest mobile platform for time spent on mobile, and for the daily audience on mobile, according to comScore.

Weaknesses

Declining Traffic: Zynga Inc (NASDAQ:ZNGA)’s daily users came trickling down to 56 million at the end of 2012, from a high of 72 million. The decline can also be seen from the monthly active base, which declined to 298 million active users from a high of 311 million users.

Weakened ties with Facebook: Facebook Inc (NASDAQ:FB)’s importance for Zynga is paramount, and even more so because Facebook is directly responsible for driving a lot of user traffic to Zynga’s platform, as well as a major outlet for revenues. Zynga is a leading developer on Facebook with 5 of the top 10 games, and going forward, weakened ties with Facebook, might impact user eyeballs as well as negatively impact the amount users spend on online gaming and also in gaining newer customers.

Lack of Recurring Purchases: The business model of Zynga Inc (NASDAQ:ZNGA) revolves around engaging and stimulating the large pool of users to play the games, and to make these customers purchase social gaming products. Often times, users are likely to be reluctant to purchase such social gaming goods on a recurring basis, which is a negative for the company.

Persistent Losses: While the company’s losses have narrowed substantially, the company is still losing money. Zynga’s net loss for 2012 stood at $209 million on revenues of $1.28 Billion. And in 2011, Zynga Inc (NASDAQ:ZNGA)’s net loss was a whopping $404 million.

Opportunities

Expand Real Money Gaming: A major opportunity for the company lies in its ability to enter the real money gaming market in the U.S. Zynga is hoping to build up an online ecosystem for real money gaming and has already applied for a license in the state of Nevada. Zynga Inc (NASDAQ:ZNGA) can use its technical know-how and adopt a similar playbook from its UK launch for the U.S. market and position itself for longer term success.

Grow Advertising Business: In addition, to selling social gaming goods, Zynga makes a decent amount of revenues by showing advertisements on its platform. And the company’s advertising revenue in 2012 was $137 million, which represents a year-over-year growth of 85%. And going forward, Zynga can grow its ad revenues substantially by tapping more brand advertisers, who command huge advertising budgets.

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