Zynga Inc (NASDAQ:ZNGA)’s change of heart may cost it its life. The company announced that it will no longer seek a real money gaming platform in the United States, choosing to focus on casual games to drive future performance.
So what does this mean for Zynga?
Why Zynga needs real money gaming
I’ve been a critic of Zynga’s plans for real money gaming, but not because it is an unprofitable venture. Rather, I feared that Zynga was making a move that would destroy shareholder value. I proposed that Zynga Inc (NASDAQ:ZNGA) should “sell” its members to another casino operator to enter gaming with an asset-light business model that would provide instantaneous profitability. Why do all the work necessary to open an online casino when you can ride the coattails of an already established player?
Online casinos pay hundreds of dollars to partners to recruit a single player. Zynga could simply cash in its millions of fake money players to collect upfront payments and royalties on their real money gaming at another online casino. No risk, huge rewards.
Unfortunately, recent statements shed zero light on the strategy Zynga plans to follow. If Zynga Inc (NASDAQ:ZNGA) intends to work as a partner and refer its members to another casino operator, the company would be a definite buy. Based on my numbers from an earlier article, Zynga is valued at roughly $35 for every fake money poker player.
That’s pretty low, especially when one considers that a casino will pay $200 or more for a real money player, and that Zynga has other profitable games that could be left to “run off” and pay millions per year to the company until the cash flows eventually go to zero.
Assuming a 10% conversion and $200 payment per player, Zynga Inc (NASDAQ:ZNGA) would nearly cover its entire market valuation in a single year and grab very valuable cash it could use to invest to find new, free-money players. Zynga needs to be the “farm team” for existing casinos.
Did Candy Crush lure Zynga back to casual games?
I see little reason for Zynga Inc (NASDAQ:ZNGA) to spend more to build out its casual gaming business. The company finds little success in this hyper-competitive business where the average customer sticks around for only a few months.
In just the past year, a new studio claimed the title as the number one Facebook Inc (NASDAQ:FB) game publisher. A hit game by competitor King.com, Candy Crush, popped on the scene, and its success is met with an estimated $200 million of annual sales. If nation-wide cable advertising is any indication, Candy Crush is making a mint from players on all platforms.
Zynga only wishes it had a game like Candy Crush in its roster.
In the latest quarter, Zynga reported second quarter revenue of $230.7 million, besting expectations of $183 million. However, higher sales didn’t lead to profitability. Once again, Zynga Inc (NASDAQ:ZNGA) recorded a quarterly loss of $15.8 million in net income.
Bookings, a measure of future quarterly revenue, fell 38% year-over-year to $188 million.