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Why Zynga Investors Are Losing Their Shirts

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Zynga
Social gaming giant Zynga (ZNGA) has a new game for investors: DudsVille.

The company behind Words With Friends and FarmVille opened sharply lower on Thursday after posting disappointing quarterly results.

Analysts -- including some of the investment bankers that had no problem taking Zynga public at $10 just seven months ago -- have chimed in to downgrade Zynga despite the much lower price that investors can buy into today.

How bad must a report be for a stock to open 40% lower the next day?

Zynga's revenue climbed 19% to $332.4 million. That may not seem so bad, but Wall Street was banking on revenue of $344.1 million.

The numbers get uglier from there.

Zynga posted a surprising loss for the period, but even after backing out all of the one-time charges, the fallen dot-com darling's adjusted profit of $0.01 a share was just a fifth of what analysts were expecting.

Oh, and it gets even uglier than that.

Zynga's bookings -- an important metric for the online gaming company -- clocked in at just $302 million for the quarter. That's less than the $329 million in bookings that it served up during this year's first quarter. In other words, Zynga may be peaking.

Finding a Word to Play When Your Only Tiles Are F-A-I-L

Zynga argues that there are now 72 million daily active users, a 23% surge over the past year. Unfortunately for Zynga, revenue per user is declining. Whether it's a failure to engage gamers or simply a bump in the monetization process, Zynga's playing a game that's hard to win.

One of the problems with Zynga is that Facebook (FB) -- where the social gaming leader generates most of its traffic and revenue -- recently tweaked its news feed algorithm, making it harder for Zynga to promote its older games virally.

There also appears to be some gamer fatigue setting in. Social games are peaking in popularity sooner, forcing Zynga into a vicious cycle of continuing to crank out new games to retain its overall market leadership.

That's a scary model for investors, because anybody can step up and become the next Zynga at any moment.

Waiting for the Madness to End

It's been five months since my original "Why Zynga Will Never Be Great Again" article. The stock was trading for $12 at the time. The stock opened at $3.07 on Thursday morning.

In retrospect, Zynga went public at too dear a valuation. Investors also became enamored with the concept of social gaming without assessing the low barriers to entry that will keep Zynga forever on its toes.

The good news for Zynga's downtrodden investors is that the company is profitable, and it still expects to post positive earnings for all of 2012. Even the high end of its guidance implies that bookings will continue to decline, but clearly the company isn't worthless. It's simply a matter of figuring out when the stock will truly bottom out, and that's still a dangerous game for investors to be playing.


Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article. The Motley Fool owns shares of Facebook.


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Terry and Mandy

Zynga was over hyped and over priced from the beginning. The financials were all "smoke and mirrors". I hope there ends up being a class action lawsuit against the company. How can an investor make an intelligent decision to buy or sell a stock when the public financial information is not reliable or verified?

July 27 2012 at 3:45 PM Report abuse rate up rate down Reply
craigmrfrn

Coming from someone that doesn't even use a cell phone, First I can't believe an adult would play these stupid things and second, I can't believe an adult would invest in this garbage. So much more to do in life.

July 27 2012 at 12:17 PM Report abuse rate up rate down Reply
Steve

THE PROBLEM WITH ZYNGA IS THOSE DAMN CHALLENGES EVERY DAY AFTER EVERY DAY,,PEOPLE ARE DROPPING OUT BECAUSE OF IHIS. AND IM GETTING READY TO FOLLOW.AND I HOPE THEY GO UNDER WITH SOME OF THE OTHER CROOKS

July 27 2012 at 9:49 AM Report abuse rate up rate down Reply