Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Zynga Inc (ZNGA) Just Pulled a Complete Bait-and-Switch on Investors

Mark PincusUntil recently, there was really only one reasonable argument to invest in Zynga Inc (NASDAQ:ZNGA): online gambling was about to become legal in the US, and Zynga Inc (NASDAQ:ZNGA), with its online gaming know-how, was poised to benefit.

Now, that argument has been destroyed. Last week, the company admitted that it no longer has any intention to pursue online gambling in the US. With that, the investment case for Zynga has completely changed, and any remaining investors must have faith in Don Mattrick’s turnaround effort.

No more online gambling

Last September, Zynga Inc (NASDAQ:ZNGA) hired online gambling exec Maytal Olsha from UK company 888 Holdings. Shares began to rally on the hope that the company could use its gaming assets in the world of real money gambling.

Feb. 8, Zynga shares soared 11% after New Jersey’s governor voiced his support for online gambling. The state — along with Nevada and Delaware — later moved to fully legalize online gambling, and Zynga shares continued to move higher.

But then, early in July, Zynga hired Don Mattrick to be its new CEO. Mattrick came from Microsoft Corporation (NASDAQ:MSFT), where he ran the Xbox division, and was clearly more focused on video games than casinos.

As I wrote back at the time, despite the fact that Zynga Inc (NASDAQ:ZNGA) shares soared on the announcement, Mattrick’s hire suggested that Zynga would be focusing on gaming, not gambling.

Facebook gaming isn’t flawed

When Facebook Inc (NASDAQ:FB) reported earnings last week, one thing was clear: Zynga’s problems with its business model are company-specific, and not endemic to the broader social gaming industry.

In the most recent quarter, Facebook Inc (NASDAQ:FB)’s gaming revenue actually increased by some 7% despite the fact that Zynga — which has long been Facebook’s key gaming partner — has struggled. During the earnings call, Facebook specifically mentioned one title (Candy Crush) as contributing to the growth.

Candy Crush has been enormously popular for the game’s developer, UK-based King. By some estimates, the game is projected to earn King over $200 million in the next year.

Candy Crush’s success suggests that Zynga Inc (NASDAQ:ZNGA) is victim of poor management, not a bad business model, and that more broadly, Facebook Inc (NASDAQ:FB), which is still reliant on social gaming for a big chunk of its revenue, should not be too concerned with the decline of Zynga.

What’s the plan?

But the problem is that Zynga Inc (NASDAQ:ZNGA) still lacks a turnaround plan. Mattrick is widely hailed as a great executive (Wedbush’s Michael Pachter said he thought Mattrick would be Electronic Art’s next CEO), but he has yet to articulate a concrete plan.

The most Mattrick has offered has been some vague platitudes about getting “back to basics” and “looking under the hood.” Of course, it’s hard to fault the guy — he’s only been on the job for a few weeks.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.