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Zynga Inc (ZNGA): The Safest Speculative Bet

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In the last few quarters, Zynga Inc (NASDAQ:ZNGA) has lost approximately 80% of its market capitalization. This decline in value has been a result of multiple factors, both internal and external. Changing market trends and a deteriorating relationship with Facebook Inc (NASDAQ:FB) have been major reasons behind Zynga Inc (NASDAQ:ZNGA)’s downfall. The management is also a culprit for relying on a single partner (i.e. Facebook Inc (NASDAQ:FB)) and missing the growing popularity of smartphone gaming applications.


Zynga CEO and founder Mark Pincus is trying to turn it all around. In an effort to reduce the cash burn, he has fired 18% (520 employees) of Zynga Inc (NASDAQ:ZNGA)’s workforce. This will save the company around $80 million and comes at the cost of New York, Dallas, and Los Angeles offices. More importantly, it has hurt investor trust in the company’s ability to turn around fortunes. As a company relying on ‘its creative brain power’ to come up with a miracle company saving applications, firing those exact people can do nothing but shatter investor hopes. Despite multiple issues, the company is trading at super cheap valuations and is still pretty cash-rich.


After the decline in the company’s market value, revenues have followed suit, declining from a high of $332 million to $264 million in March 2013, a 21% drop. Despite this, it still managed to exceed earnings expectations for 1Q2013. The street was expecting Zynga to post a loss of $-0.04; the company managed earnings of $0.01. The real sign of worry is the negative outlook for the coming quarter.

Although it managed to beat earnings estimates for the first quarter, Zynga Inc (NASDAQ:ZNGA)’s guidance for the second quarter is still way below market expectations. The company expects bookings in the range of $180 million to $190 million and EPS to be in the range of $0.04 to $0.03. The street expected Zynga to post bookings in the range of $235 million but a much lower EPS of $-0.01.

As the company is trying to reinvent itself by targeting the mobile gaming segment, cash is an essential part of any such equation. Contrary to common perception, Zynga is still cash flow positive. The company generated approximately $26 million from operations last quarter and added a further $40 million to its net cash. The recent layoff will save Zynga around $80 million and further improve cash flows. It has approximately $1.3 billion in cash and equivalents i.e. 65% of market capitalization or $1.7 per share.

Business Model

The market usually compares Zynga Inc (NASDAQ:ZNGA) to companies like Pandora Media Inc (NYSE:P) and Groupon Inc (NASDAQ:GRPN). On the surface, it does make sense as these companies share around the same market capitalization, the same industry and the same massive price fluctuations. In reality, Zynga has nothing in common with this group. For example, Pandora Media Inc (NYSE:P) has a basic business plan flaw that makes it an unwise investment: The company has not generated a solid profit in its entire existence despite continuous revenue increases. Investors have been expecting Pandora Media Inc (NYSE:P) to develop ‘economies of scale’ and turn a profit, but its high content acquisition costs keep squandering shareholder value. On the other hand, Zynga has been generating actual profits with positive operating cash flows.

The aim of this discussion is to show that there is nothing wrong with Zynga Inc (NASDAQ:ZNGA) as a company. It is only facing the problem of a changing market trend, which is a common one in the technology sector, due to its past evolution. Therefore, the Street can still expect Zynga’s management and the business model to create shareholder value.

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