Zynga Is Locked and Loaded -- but It Shouldn't Be

I did it. I gave in. I went and bought a copy of OMGPOP's popular Pictionary knockoff Draw Something. I could have downloaded the free ad-supported version, but I was in a feisty mood so splurged with the $0.99 pay version (you get 2,000 extra words!).

The scene of the crime
My wife and I were at a friend's house, and the Draw Something bug had clearly bitten every single one of our amigos, and considering its social elements it quickly spread to us like a contagion. This was weeks ago, and the game provided me well over a buck's worth of entertainment. Except now ... I'm getting bored with it.

It's a fun little game, but ultimately can it really withstand the test of time, as our collective attention spans continuously shrink, for better or worse. How long can the game really bump elbows with the likes of Angry Birds and its fowl offspring?

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I have to wonder whether Draw Something will be little more than a passing fad, as it begins to fade from my own consciousness. That's a key question that Zynga (NAS: ZNGA) needs to be asking itself right now, especially since $200 million is quite a price tag for to buy a developer that's mainly proved to be little more than a one-hit wonder so far. (Zynga tried to buy Rovio, too, by the way.)

I'd wager that few people out there could even name OMGPOP's other mobile titles (Hint: There are two others). Given up? That's because Puppy World and Boom Friends aren't particularly exciting, interesting, or innovative -- not that Draw Something is reinventing any wheels any time soon.

A baby elephant gun
Zynga has effectively paid $200 million for a single title and the small team of OMGPOP's developers (excluding this one). The top spots in Apple's (NAS: AAPL) iOS App Store are definitely valuable, but Zynga won't be able to afford every title that climbs its way up, despite how badly it wants to expand into the mobile-gaming front with platforms like iOS.

Apparently, Zynga thinks it can be done, as CEO Mark Pincus and merger exec Barry Cottle recently told Bloomberg that it's still on the hunt for more acquisitions, and the $1.8 billion in cash and investments on the books are ready and waiting to be deployed to such ends.

The social gamer has picked up 22 separate companies over the past two years, and Pincus is looking to do several more acquisitions that are about the size of the OMGPOP deal in the coming years. Remember when I called Zynga's current acquisition strategy unsustainable "in terms of both dollars and integration," because of its dubious corporate ethics and cutthroat internal culture? At least six of the startups that Zynga has acquired have seen their founders jump ship.

Zynga was able to poach Cottle from gaming giant Electronic Arts (NAS: EA) with a juicy pay package. The gaming stalwart had outbid Zynga for PopCap Games last year, maker of Plants Vs. Zombies and Bejeweled.

Draw Something is estimated to be bringing in $250,000 per day in revenue. That means it would take 800 days, or more than two years, to break even with the acquisition price on sales. Keep in mind that's revenue, not profit. That also assumes that OMGPOP's other games aren't contributing too much (a mostly fair assumption), and that Draw Something can keep its top spot and maintain its revenue-generation rate for such an extended period of time -- not likely on a platform as competitive as iOS.

A rhetorical question
Zynga is effectively extending a standing offer to acquire any developer that makes it up the charts, either by luck or by skill, which is not sustainable. That brings up the age-old question: Would you rather be lucky or good? Don't bother answering that, because Zynga will still acquire you regardless.

At the end of last year, before the OMGPOP acquisition, the company had about $123.9 million in goodwill and intangibles on its balance sheet -- less than 5% of total assets. As it continues its acquisitive streak and grows its goodwill and intangibles, it also increases the risk of eating impairments down the road if some of these acquisitions prove not to be worth the hefty prices. This is particularly true as it pursues acquisitions of dubious value, like the OMGPOP deal.

Sorry, Zynga, but you overpaid for Draw Something. It would have been cheaper to just copy it.

Zynga is a Faker Breaker, which doesn't bode well for its chance of delivering multibagger returns. That's something that Rule Breakers excel at, so Discover the Next Rule-Breaking Multibagger by checking out this special free report. It's free.

At the time this article was published Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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