Zynga's Future Has a Lot of Zing
Mar 13th 2012 1:49PM
Updated Mar 13th 2012 1:52PM
Zynga (NAS: ZNGA) recently faced criticism concerning the long-term viability of its business and its high dependence on Facebook for revenue. Besides, the company came up with a huge $435 million fourth-quarter loss last year due to expenses pertaining to research and development, which clocked in at a whopping $444 million.
Nevertheless, I have reason to be optimistic, as Zynga is changing the way it does business. I feel that the company has the potential to capitalize on its popularity and convert today's losses into tomorrow's gains.
A new platform for growth
Zynga recently launched its own online platform under zynga.com, which allows users to play its games without having to visit Facebook. The platform would operate in 16 different languages, thus appealing to a wide international audience. However, the setup still depends on the social networking site's credit system. So, if a user pays for any virtual asset, such as property in Farmville, Facebook still gets a 30% cut for those proceeds. But that's fine, because Zynga has ready access to Facebook's base of 845 million monthly active users. So, how does this new platform change anything?
Zynga's platform also opens up the opportunity to generate advertising revenue. It would also allow the participation of third-party game developers, who would become customers for the company's IT infrastructure. But the benefits do not end here.
Previously, the company was heavily reliant on Amazon.com's (NAS: AMZN) cloud computing service that cost $100 million every year. But now, since the company is using its own Z-Cloud infrastructure with the aid of cloud-computing technology from Citrix (NAS: CTXS) , there would be a lot of potential cost savings in the long run. But wait, there's more...
Zynga also has a footprint in the mobile segment with games such as Farmville, Cityville, Zynga Poker, and Mafia Wars available for Android devices and Apple's iPad and iPhone. The company can use its experience in this space and include games from third-party developers. This would contribute yet another source of revenue for the company and serve as a great platform for small mobile game developers. So, with the growing popularity of smartphones and tablets, this could only mean big business for Zynga. However, the ride may not be too smooth due to competition from established players such as Glu Mobile and Gameloft.
The Foolish bottom line
While Zynga may still depend a lot on Facebook for an audience, I see the introduction of a new platform as a good strategy going forward. This would ensure the company's diversification into other revenue streams and serve as a launch pad for growth in the years to come.
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At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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