For awhile, Zynga (ZNGA) was poised to be the biggest social gaming developer in the world. The maker of FarmVille, Mafia Wars, and Words With Friends was the king of wasting time at your desk. Their biggest good luck charm was Facebook (FB), since many Zynga games appeared on the site. The meteoric rise of Mark Zuckerberg’s online garden party gave Zynga CEO Mark Pincus’s company a whole other level of success.
The two companies became integral to each other’s well-being and growth. They were both each other’s best source of revenue. In-game transactions of online goods brought in revenue for all involved. But once the Facebook initial public offering showed just how much the company was overvalued, Nasdaq had to halt the selling of Zynga stock for almost an hour when it fell 13%. Now that Facebook’s growth has slowed down, Zynga faces an uncertain future.
The number of players for Zynga’s games has been steadily decreasing for months. One theory from Cowen analyst Doug Creutz is that the move from PCs to mobile devices has shrunk Zynga’s active user numbers.
When more people use their tablets and smartphones in place of computers, Zynga loses gamers. The company’s attempts to enter mobile gaming haven’t done much good and appear somewhat desperate.
On Tuesday, the day of Creutz’s report, Zynga’s stock triggered the short-selling circuit breakers at Nasdaq when it fell 13% to below $5/share. Despite being Facebook’s biggest money maker, Zynga’s stock has taken a steep downward turn. On the day of Facebook’s disastrous initial public offering, Zynga’s stock fell roughly 15%. Zynga’s value at the time of its initial public offering was approximately $9 million. They have since lost $5 billion of that value.
This is not to say that Zynga doesn’t trade well. It trades at 18.3 times forward earnings, while traditional video game competitor Activision Blizzard (ATVI) trades for 11.7 times, while Electronic Arts (EA) trades for 11.3 times.
So is Zynga worth the trouble? There’s a lot of evidence to say they’re trying to branch out, but it might be too late.
Currently, Zynga has to face down competition on the social gaming and mobile gaming fronts. Even though FarmVille and CityVille rule the Facebook-based simulation market, they can always be replaced by the next big thing. Electronic Arts will be releasing a new SimCity installment, SimCity Social, for free on Facebook later in June. SimCity is a big franchise for EA, having launched a long running video game series and a slew of successful spinoffs, including The Sims. With a recognizable name in video games and a good reputation for the series, SimCity Social will probably give Zynga’s micromanaging games a run for their money.
In March, Zynga acquired mobile game developer OMGPop for $200 million. The move came after the massively popular iOS and Andriod game Draw Something beat Zynga’s own Words With Friends in sales. Buying OMGPop was a good investment for Zynga as it added a whole new team of developers versed in the game market. Plus there is a Draw Something TV game show in the works and the company is also partnering with Chinese social network Weibo (SINA) to make a Chinese language version of the game for the site.
Another problem is the company’s reliance on Facebook as a business model. To correct that, Zynga created their own gaming platform with zynga.com. It is looking to find new revenue streams outside of social media, possibly with online gambling. This would bring in a new set of partners for Zynga to do business with, including casinos. At least they recognize the need to not be fully dependent on Facebook to draw in new gamers.
However, the general feeling is that Zynga is not a good investment. Dave Their of Forbes is concerned that the company is relying too heavily on its old hits and hasn’t made a good game to take up the challenge. Either be the hit maker, or be the publisher and platform for these types of games. Zynga’s performance has even made some question how mobile game companies will do at offering, including Angry Birds developer Rovio.
But keep in mind that speculative stocks have gone through the wringer since their peak in April and some market players have said they have renewed optimism for the category. Also, Internet IPOs have generally underperformed. Some people are just generally concerned with investing in gaming companies and new media. Plus, Facebook could have a big quarter and that might support Zynga. Overall, the stock is performing at the level of most video game companies right now.
On Friday, shares of Zynga’s went up 11%. It will still end the week at an 8%, but the stock regained most of what it lost this week. Analyst Heath Terry of Goldman Sachs said that the current price of $5.50 per share doesn’t truly represent Zynga’s prospective growth. Goldman finds Zynga’s risk/reward enticing and feels that new product announcements in the second quarter ought to help.
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