By now, everyone is familiar with the disaster of an IPO that is Zynga (ZNGA), down 75% from its $10 offering. Investors in the gamer stock, and in social media stocks in general, have been hammered in 2012. The Facebook (FB) IPO hype quickly faded and those that bought pre-IPO ran for the hills sending shares of the sector down even faster. Disappointing earnings reports over the last two quarters have also doomed shares of Zynga sending it to the recent lows of $2.09.
So, you might be asking what are we saying when we talk about loving Zynga now? Valuation and hatred are the two things investors should think of. On a valuation basis, it is hard for anyone with common sense to argue the stock is not cheap. Even though the company continues to misstep and produce poor guidance, there is the matter of the huge war chest of cash they have, $1.2 billion as of the recent earnings report. Of course, part of the reason the market is ignoring the large cash balance here is the huge mistake the company made earlier this year when it overpaid for Draw Something and fear the company, being in desperation mode, could make another stupid acquisition. Zynga has company, though, in this field, just look at what happened to Hewlett-Parkard Inc. (HPQ) and its buyout fiasco recently! Zynga got over-zealous with its cash and made an ill-advised buy. The good from this could be that it wont make such a silly mistake again.
Hatred is the other reason to consider Zynga, too. By that we mean the extreme hatred you can see anytime the stock is mentioned. A look, we are sure, at some of the comments that will be posted on this article will be a good indication of that hatred. Read any Seeking Alpha article on Zynga and the doom and gloom posts and articles will dominate. This is usually a good indication of a potential bottom in a stock, especially given the large cash stance this company has. Only last month this same hatred and foreboding doom could be seen in talk on Facebook and here, a month later, the stock is up 50%. The stock market is fickle and forgetful, and what happens many times is a stock considered this year's dog, is the darling in the next year.
News that Zynga and Facebook have modified their arrangement ended what was a nice recent run in the stock price but, from an optimist's eyes, that can be viewed as a positive development. If the gambling aspect of Zynga really is the savior, then why share said revenue with Facebook? Also, there seem to be many positives for ZNGA from changing the deal but with the doom and gloom surrounding the stock, every move they make now is viewed negatively. Traders forget that GooglePlus is gaining traction and is a competitor of Facebook. Now that Zynga has won its freedom, how long until we see news of a deal with Google (GOOG)? How long until Zynga games can be played on Google+?
The real reason to gamble on Zynga is, of course, the gambling aspect of the company. We actually view this as the only real reason to own the stock given the lucrative aspects of online gambling, especially if online gambling becomes legal in 2013. October news of the deal in the U.K. is but the beginnings of what should be a very profitable side of the business for Zynga. We view Zynga as a backdoor casino play and if things go right in the coming year and online poker is made legal in the U.S., Zynga could be a very big winner. Zynga made its name on Facebook with its online poker offering and with a currently active base of millions of users of poker daily, there is a large pool to draw from if and when this becomes legal. Investors are under-estimating the demand for legal poker and with the fraud from sites such as Full Tilt, poker players may be reluctant to dive in unless it is a company they trust, such as Zynga. This negative storm cloud over Zynga will pass. With over $1b in revenues, $1.2 b in cash and the potential for a large gambling business, Zynga may very well surprise in 2013. Investors who now hate the stock could be loving it next year. A move back to its summer highs of $6 is a 250% gain from here. Think about that!