Zynga Inc (ZNGA): The Company’s Gamble, Royal Flush or a Bluff?

After seemingly endless arguing among investors and analysts regarding mobile gaming innovator Zynga Inc (NASDAQ:ZNGA), the market appears to have settled on a positive affection, as the stock soared yesterday following the company’s announcement that it would begin its real money gambling service in the U.K. The gambling concept sounds like a possible saving grace for the beleaguered tech firm, with revenue potential that could bring the company from market pariah to darling status in no time. However, this is the very beginning of a very large, risky undertaking. Should investors buy now, or wait until the online gambling space becomes clearer?

Zynga Inc

Mouthwatering potential
For tech and growth investors, the concept of online gambling is downright mouthwatering. Take, for example, 888, an existing online real money gambling company. The 888 Poker game has roughly 3,000 average active users, and generated $87.5 million in revenue for 2012. That’s almost $30,000 per user, annually. The company credits its growth to mobile expansion. Zynga Inc (NASDAQ:ZNGA) hauled in $1.28 billion last year, and has an incredible scale advantage over 888. Zynga Inc (NASDAQ:ZNGA) Poker, the company’s fake money gambling game, has 102,000 active users. Now, there will not be 100% conversion from fake to real, and the gambling program is only currently launching in the U.K., but we can extrapolate this data out to give us an idea of the potential.

If Zynga Inc (NASDAQ:ZNGA) were able to leverage just 10% of their active Poker users into real money gamblers, that could potentially bring in an addition $300 million in revenue — just from poker. Is this some oversimplified math? Of course, but it gives us a rough idea of the addressable market and what they can earn per user.

Plenty of risk remains
The numbers above are enough to excite even the most conservative investors, especially considering the fact that the company’s stock remains close to its all-time lows. But before you hit the buy button, keep in mind that there remain both macro-level and company-specific risks.

Online gambling in the United States is still a “TBD” issue — and there will be plenty of competition from well-funded, more diversified gaming companies such as Wynn Resorts, Limited (NASDAQ:WYNN). One option, as noted in a Forbes article, is for Zynga Inc (NASDAQ:ZNGA) to partner with Wynn Resorts, Limited (NASDAQ:WYNN) to leverage the former’s technology with the latter’s deep gaming experience. This, to me, is a better way to manage the inherent risk.

Zynga itself does not have a stellar management track record. Not even a year ago, the company paid $100 million for one-hit-wonder OMGPOP—creator of Draw Something. That acquisition was almost completely written down. The mobile gaming industry, while quickly growing and potentially lucrative, moves incredibly fast and consumer preferences tend to change with the wind. Major investments in any one game could prove to be poor uses of capital.