There’s little question that Zynga’s (ZNGA) heyday is firmly in the past. Long gone are the times when Facebook’s (FB) pastures were blanketed with Farmvilles, its landscape dotted with virtual cows and digital crops in need of constant tending and attention.
When it became apparent shortly after Zynga’s 2011 IPO that Facebook viewed Zynga less as a resident and more as a squatter, and subsequently kicked them out, Zynga was left without a home. Leaching off Facebook’s resources was how they had evolved to survive. Without that, they were left without recourse. They were homeless.
Zynga is a Rolling Stone...
To be sure, Zynga didn’t lie down and give up the virtual ghost after getting the boot. They tried to play nice with Facebook, and introduce less intrusive gaming platforms that didn’t spam user’s newsfeeds. Those games were treated with indifference. Customers had moved onto app games, like King’s (KING) mega-hotspot Candy Crush, and innovators like Glu Mobile (GLU) , who were growing at an impressive clip, further crowded Zynga out of the app market.
So Zynga moved on again, trying to move into a decidedly different kind of gaming. In 2013 Zynga tried a different tack and started preparing to transition into the lucrative world of online gambling.
Thing is, there’s already companies well entrenched in gambling. Caesar’s (CZR) , Wynn (WYNN) , among myriad other Vegas powerhouses. And they didn’t want a former Facebook squatter with a funny name trying to move onto their turf.
Their powerful lobbies effectively quashed Zynga’s move before it even started, and Zynga eventually abandoned the ploy. And still, they had no place to go. And still, they kept bleeding money.
...But They Still Have a Pocketful of Cash...
The reason investors in Zynga aren’t completely losing their minds is that the company still has a lot of resources they pilfered while they were living off the fat of the Facebook. About $1.5 billion in liquid assets, which is enough to keep the company afloat for a few years.
That’s assuming Zynga can affect a turnaround plan. Right now, that track is going back to their land of milk and honey, addictive gaming.
They can’t lean on Facebook anymore, though. As Google did to leach Demand Media (DMD) , who got hammered when Google wised up to their algorithm exploitation and penalized them out of profitability, so Facebook has done to Zynga.
To be sure, Zynga’s prospects, by a couple metrics, are improving, Their last earnings report showed that their monthly user metrics, while still far off from the Facebook era, had risen from 112 million to 123 million, and monetization per user had increased five percent as well, from 6.0 to 6.3 cents.
But this misses the larger story. Zynga is still losing money at an unsustainable rate. Well, on a long enough timeline all losses are unsustainable. But their loss rate, while slowed form the 2012 $400 million bloodletting, still looms large. They need a new hit product or, within five years, they will die. While they have the cushion to find themselves, that cushion is deflating as cash continues to seep out.
...Which They're Spending Like a Sailor on Shore Leave...
CEO Don Mattrick tried to right the ship, dishing out $200 million to buy the game OMGPOP only to see it fall out of fashion in a matter of weeks. In online gaming, trends aren’t seasonal, they’re daily.
The company has surmised that finding the land of profitability isn’t feasible until 2015. But following comments made by Mattrick on June 5 that time could be even further away. If ever.
At the Merrill Lynch 2014 Global Technology Conference, Mattrick discussed Zynga’s new moves. Like King, they have finally tried to move into the fruitful world of apps. But that move, the launch of Farmville 2, a sequel that nobody wanted, has been received tepidly.
...While Their Time is Running Out.
Moribund tech companies can certainly turn around if they have cash to support a transition. Apple (AAPL) , IBM (IBM) and Priceline.com ($PCLN), for example. But none faced quite the crisis that Zynga faces now.
Zynga’s needs to return to 2011, the last time the company had a profitable year, and move past their losses. They're trying, with major game launches like Farmville 2. A game that nobody really expects to do much of anything. It's an attempt to go back to a different time, an attempt that cannot and will not work.
The online gambling thing didn’t work, but at least it was an attempt to move on. They need an aggressive move onto undiscovered land and into an area already not exploited by a King.
But instead, with moves like Farmville 2, they’re trying to move on by moving back home. And it’s not going to work.