When Zynga Inc (NASDAQ:ZNGA) first came out, it came out with many strong game titles, including Farmville, Cityville, Mafia Wars, and Words with Friends. The company priced its initial public offering at $10 per share — at that time, the biggest tech IPO offering since Groupon. Zynga Inc (NASDAQ:ZNGA) included 100 million shares at $10 per share, bringing its valuation to $1 billion. Zynga Inc (NASDAQ:ZNGA) had a great pop on its IPO, but over the last few years it has dropped significantly for many reasons. The company now trades at $3.45 per share, but it seems to be holding well at that level.
Over the last few years Zynga Inc (NASDAQ:ZNGA) has been struggling to make revenue. In 2012 the downtrend continued, and the company reported losses throughout most of 2012. In an effort to change things at the company, CEO Mark Pinkus laid out a plan to reduce costs.
The plan was to layoff at least 100 employees throughout the different game studios, and shut down 11 game titles. Some titles were pretty strong, and yet they were still shut down anyways.These games were: PetVille, Mafia Wars 2, Fishville, Vampire Wars, Treasure Isle, and Indiana Jones Adventure World.
Zynga wants to cut ties
Zynga Inc (NASDAQ:ZNGA) grew well on its end users, because it is part of the most played gaming platform on Facebook Inc (NASDAQ:FB). Despite this phenomenon, Zynga has other plans. It wants to separate its ties with Facebook Inc (NASDAQ:FB) completely so that it is not dependent on Facebook for future revenue. In my opinion this will be a wise move by the CEO for shareholders.
Zynga Inc (NASDAQ:ZNGA) should relaunch itself so that it is not reliant on Facebook Inc (NASDAQ:FB) for revenue. Facebook has a good relationship with Zynga, since Facebook is receiving 15% of Zynga’s profit. In my opinion Zynga should have left Facebook many years ago. Since it is tied to Facebook, Zynga had lost its opportunity to be its own stand alone platform. It was unable to set a fanbase of its own, and thus creating the problem the company endured over the last few years.
One of the executives stated that the good part about starting to move away from Facebook, is that players will no longer be required to use their real names to log in. I think this current problem turns off many players as they don’t want their real names shown online. So now Zynga offers a way for its users to create their own unique name, that allows them to be able to log into the game network.
On Nov. 30 of 2012, Facebook had changed its deal with Zynga. Zynga was now just like every other game contractor with Facebook. I say this, because Zynga can no longer take users away from the Facebook platform. Zynga is still not completely broken away from Facebook, but the way things are going that all may change later on. In March of 2013 Zynga is also no longer required to post ads on its website from Facebook, or force users to use Facebook credits for their games.
Still I think it will be better in the long run for Zynga to try and steer away from Facebook. Zynga is moving to mobile gaming, and I think it should define itself as a stand alone game maker like Glu Mobile Inc. (NASDAQ:GLUU). It will not only benefit the company, but also all future investors in the long run.
Earnings surprise
Even though earnings throughout 2012 were not as investors had hoped, things started to turn around in the fourth quarter. This was when Zynga reported earnings that beat analyst estimates. The company reported earnings per share of $.01, and sales that topped $311 million. Analysts expected a loss of $.03 per share, and revenue of $212 million.
GLU Mobile as competition
Glu Mobile Inc. (NASDAQ:GLUU) is creating intense competition for Zynga. Glu is able to branch out more than Zynga can currently. This will hurt Zynga later in the long run, when the competition intensifies. The difference is that Glu is able to bring its games to multiple platforms. For example it has launched its popular titles on the Mac computer, and PC. I would say, Zynga should eventually branch out to launch its games under new platforms to stay competitive.
People are spending plenty of time on mobile games. Glu has had no problems in the 4th quarter of 2012, when it reported earnings that beat analyst estimates. Glu reported that in the fourth quarter of 2012 it earned an EPS loss of $.05 per share, better than the analyst estimate loss of $.07 per share. Revenue for the quarter was slightly higher coming in at $21 million, versus the analyst estimate of $20 million.
Gambling delight
Zynga has had some trouble generating revenue in the past, but all will go well when Zynga starts to generate revenue from its online gambling business. It could significantly change Zynga’s business in the future. So far the states that have legalized online gambling are Nevada, Delaware, and New Jersey.
On Wednesday Apr. 3, the company launched its online gambling platform in the United Kingdom. This is evidence that Zynga wants to shift slightly away from social gaming, to real online gambling. The stock price of Zynga edged higher by 15% on this news, and this shows the market’s sentiment around the potential of the gaming platform to branch off to new areas. The downside though, is that analysts are estimating that the revenue for Zynga’s online gambling unit won’t be factored in until 2014.
The reason I believe Zynga’s gambling will take off is because of the familiarity of its online poker game. Zynga already has a huge following with its first gambling game known as Zynga Poker. There are on average 6.2 million daily active users on the Zynga Poker platform. That’s not to say that all those users will branch off to start gambling online for real money, but a few may end up trying the gambling version.
Despite intense competition, Zynga will maintain itself with its established users. Another example of using familiarity for online gambling, is the 120 slot machines that it is launching its platform with. The slot games will use popular social games like Farmville, Mafia Wars, and others. In closing, it is Zynga’s brand names that will fend off the online gambling competitors in the United kingdom.
Still if you are long on the stock, the news of online gambling is good. It is estimated that 2012’s online gambling revenue totaled around $17 billion. As more states come on board for online gambling, then more money can be made by Zynga off of its users.
Zynga’s value
The company boasts a $2.7 billion market cap, and carries an estimated earnings growth of 21% over the next five years. It is a stock with a lot of risk, but still has a long way to go reach its closing 52-week high of $12.11 per share. I think that Zynga is a good investment for both short term traders and long term shareholders.
Final thoughts
Zynga, despite the problems in the past, is still a good long term stock to buy. It has reorganized its gaming business, and it has started to add online gambling games into its platform. It still has a long way to go to generate significant revenue for investors, but it will get there with its new online gaming business. Investors would be wise to take a position in Zynga, and hold long term in their portfolio.
It has some competition from other game makers like Glu, but Zynga has a fan base that it has picked up from Facebook. If it can create games that excite its users again, then their revenue story will turn around dramatically. Considering the stock is now close to its 52-week low of $2.09 per share, it may not be a bad idea to place your bet on Zynga for the future.
The article Should You Place Your Bet on Zynga? originally appeared on Fool.com and is written by Terry Chrisomalis.
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