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Can This Save Zynga Inc (ZNGA)’s Farm?

The bottom line

There are no guarantees that Zynga Inc (NASDAQ:ZNGA)’s transition will be succesful. We showed that the transition may be too late and that now fierce competition in the mobile gaming & online gambling sector are difficult challenges to overcome with less people working for Zynga. The upside is that this may the gaming stock with the lowest expectations on the Street. Allow me to explain this by comparing Zynga’s stock with Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI).

Compared with Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI), Zynga’s stock performance has obviously been the worst. At $2.70 per share, investors can’t be more clear. Few believe that Zynga wil be successful in its transition and those who are long may be well aware of the risks their position involve and yet are long simply because the stock is “too cheap:” Zynga has $1.6 billion in cash, and considering that the current market capitaliztion is $2.15 billion, Zynga is actually worth less than $600 million.

Unlike Zynga, EA may be at its best moment in the past 52 weeks. But expectations are so high that a correction is a strong possibility, since EA surprised investors by giving stronger 2014 guidance. Considering the poor history of forecasting earnings of EA and the fact that there is a major console transition going around, EA may have problems reaching its own estimate. If EA does not beat the Street, a major correction in stock price is set to occur. Again, unlike Zynga, there is plenty of room for price decreases here.

How about Activision Blizzard, Inc. (NASDAQ:ATVI)? While the current upward momentum is not as strong as at Electronic Arts Inc. (NASDAQ:EA), Activision Blizzard’s stock is 27% up in the past 6 months. But the company’s main cash cow, the highly addictive World of Warcraft, may be having problems with keeping its current base of subscribers high, as the figure has dropped from 9.6 million to 8.3 million, as it was reported in the March quarter. This story looks similar to Farmville in 2010. Activision Blizzard is trying to produce another hit to replace the World of Warcraft franchise, but it seems that a release will not occur any time soon. Under these conditions, Activision’s current stock price may not reflect the risks to which its main cash cow is exposed to in the middle run, and a correction could also be expected here.

Now, few people have high expectations on Zynga Inc (NASDAQ:ZNGA) and it is a well-known fact that the company’s revenue and user base are decreasing. Because of this, I do not see downward momentum improving all of the sudden, but the stock could be dead money for quite a while, at least until Zynga shows clear signals that its transition will be either successful or a disaster.

The article Can the Current Transition Save Zynga’s Farm? originally appeared on and is written by Adrian Campos.

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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