Zynga Inc (ZNGA), Electronic Arts Inc. (EA): Why Sticking With the Leaders Is the Best Option in Gaming

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Zynga Inc (NASDAQ:ZNGA) has fallen hard since the fanfare of its IPO. After searching in different directions to find a workable business model, the company has decided to “get back to basics.” That may be a good choice, but investors should still stick with companies like Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI).

Mark PincusZynga Inc (NASDAQ:ZNGA) was among the first casual game makers in the social space, spreading its wares free through Facebook Inc (NASDAQ:FB) and charging for in-game purchases. That model worked great for a while, particularly while that social network’s dominance grew. However, as Facebook faced its own troubles, Zynga’s unhealthy dependence on Facebook became clear.

The game maker tried to build its own website, build standalone mobile games, and was looking to latch on to real money online gambling, too. While none of these are particularly bad ideas, Zynga Inc (NASDAQ:ZNGA) has continued to struggle and has resorted to cost cutting via layoffs and office closures.

Still, revenue has been falling and the company continues to lose money. The first half of 2012 hasn’t seen any improvement. Now, the company is shifting gears again, dropping plans for real money gambling. Most investors should stay away from this struggling company.

Acquisition fodder

That said, more intrepid types might like the prospects for a Zynga Inc (NASDAQ:ZNGA) acquisition following Hasbro, Inc. (NASDAQ:HAS)‘s $112 million purchase of a controlling stake in Backflip, a casual game maker. The only problem with this scenario is that Zynga’s market cap is close to $3 billion. That’s a lot more to digest than $100 million. While an acquisition might be a possibility, it won’t be Hasbro since it already bought a casual game maker and sports a market cap of about $6 billion. Zynga is just too big.

Mattel, Inc. (NASDAQ:MAT)’s $14 billion market cap suggests it won’t bite either. That leaves the big video game makers, but they aren’t really big enough to swallow Zynga Inc (NASDAQ:ZNGA). A giant technology company could step in, but that seems like a stretch, too. It looks like things will have to get a lot worse before Zynga becomes someone’s target.

Stick to the leaders

Investors interested in the social game space should probably look to Electronic Arts Inc. (NASDAQ:EA). The company has a powerful collection of game titles, spanning the massive multi-player, action, and sports genres. And it has been more aggressive than competitor Activision Blizzard, Inc. (NASDAQ:ATVI) in its efforts to expand in the casual game market.

For example, Electronic Arts Inc. (NASDAQ:EA) purchased game makers PopCap and Playfish to quickly build a presence in the emerging casual space. It has created popular casual games like The Simpsons: Tapped Out, but the longer-term appeal is likely to be its efforts to bring its hard-core game titles to the casual market. Such titles as Need for Speed and FIFA are good examples.

After a string of four years of red ink, EA turned a profit in fiscal 2012. Although its top line fell in fiscal 2013, profit margin expansion led to a bump in earnings. Things are going in the right direction, with new game consoles from Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) likely to push sales up later in the year and beyond.

And with a broad reach, there’s serious potential for cross pollination that attracts more casual players to its hard-core titles. That said, now is a good time to consider the company’s shares since they have been rising on anticipation of the PlayStation 4 and the Xbox One.

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