Zynga Inc (ZNGA) Needs to Draw Something…

They bought OMGPOP after one of its games (Draw Something) had gone viral. In fact, there were reports that Draw Something was selling over $250,000/day in new color palettes and game upgrades. That’s over $91 million a year. Zynga Inc (NASDAQ:ZNGA) only paid $183 million for the entire OMGPOP company. This was a good move, right? Almost immediately after the purchase, Draw Something’s popularity not only stopped growing, but fell off. It’s not the only thing that fell off, as Zynga Inc (NASDAQ:ZNGA)’s stock has fallen from $13.71/share at the time of the purchase, to just over $3 today.

While Zynga Inc (NASDAQ:ZNGA)’s revenues have increased more than ten-fold since 2009, they have remained practically level over the past year. Since 2009, gross margins have increased annually, but its EPS has been in the negative since 2011. The company also has a negative FCF and a stock that has fallen nearly 58% in the past year. YTD the stock is up over 42%.

The Foolish Conclusion…

Despite its efforts, Zynga Inc (NASDAQ:ZNGA) is not showing a whole lot of promise for long term investors. It is dependent on companies like Facebook that are not performing well themselves. I think both of these companies could Draw Something up and find more production. They both lack durable competitive advantages, and certainly don’t show the value needed for bargain investors. Growth investors may see something different, but for me, there is too much risk and too little upside to invest in these companies at this time.

The article Zynga Needs to Draw Something… originally appeared on Fool.com and is written by Tyler Wofford.

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