Seeking Alpha
Profile| Send Message| ()  

1. Zynga (ZNGA) Was Nothing Without Facebook (FB)

Zynga prototyped Facebook's revenue model, helping Facebook raise money from VCs--allowing Zuck to not focus on revenue experimentation--allowing Zuck to stay focused on user experience.

Zuck's commitment to user experience overwhelmingly explains his network's success. So as discerning historians, we could question what Facebook would have become (ie. sold to Google (GOOG)) without Zynga's early support. Perhaps a better question is: to what extent does Zynga continue to rely on Facebook?

2. Zynga Has Sufficiently Lost Its Competitive Edge

If we utilize arbitrary parameters, we may arrive at any conclusion we wish, which is great for justifying page-view-friendly titles.

Arbitrarily measured in total number of users, yes, Zynga's overwhelming lead in social blockbusters has recently come down off highs. If we are measuring in exclusivity with Zuck, yes, Zynga has lost its edge. Who cares?

ZNGA Revenue Quarterly Chart

ZNGA Revenue Quarterly data by YCharts

If we are measing in revenue, then no, Zynga hasn't lost its ability to compete for market share. You don't generate this kind of revenue without an edge. If we were looking at an old company's chart, then sure, that could be a top. But we are looking at an inceptive Internet treasure.

The company is young so it will experience dips in profitability, as it did in recent quarters. If you want monotonic growth buy TIPS.

Courageously, Pincus has made uncomfortable cuts (such as this) to dramatically improve margin efficiency. This "free market" company culture might not make lifers happy, but it is antifragile.

If Zynga's games exist to make money, and they are making money, why do you care if some people are having more fun with someone else's game? Have we become so cynical that we believe the Human market for fun is really that small?

3. Online Gambling Is A Commodity

This is an extremely broad definition of a commodity. By this reasoning, a majority of highly profitable companies are selling commodities. I agree that Zynga is the next Starbucks (SBUX).

4. The Market For Online Gambling Is Limited

Online gambling is a modern drug. It has not passed an "early adopters" stage. So the early UK numbers mean nothing.

Drugs are made to fit their times. Gambling is the perfect drug for a society wherein a vast majority of people feel disengaged and powerless in everything else they do.

Rich men who pick stocks as a hobby understand the desire to feel engaged. Even rich men feel powerless beholding technology advances of unprecedented acceleration. They are happy to exchange a few tokens for engagement, as are Zynga customers.

5. Zynga Is Antisocial

This is a popular argument among blogger elites who feel their techno-bourgeois taste in esoteric indy games should be ubiquitous. It displays a stunning lack of empathy for Zynga's paying user base of mainstream users.

Zynga serves bite-sized, generic moments of escape to people. It makes them happy. It enriches their lives. Do we exist for the games, or do games exist to make us happy?

Further, many of Zynga's games carry socially conscious themes, such as farming and sharing resources with villager neighbors. These "management games" teach collaboration and planning. In real life, these management principles happen to be quite simple. What has your pretentious concept-game protesting a bomb made decades ago taught you lately?

Some have attacked Zynga's integrity for plagiarizing games. I think it actually shows their integrity. Most games, most art, most literature, build on influences subtly. Zynga does it openly, pragmatically, Chicago-style. "Good artists copy, great artists steal".

There are some who criticize generic drug makers for stealing ideas from originators. But most recognize the socially beneficial function that generics deliver. Some generic drug producers ultimately invent enhancements, or "super generics" of their own. Zynga's games are super generics. In our over-medicated society, have we become so cynical that we praise generic drugs, and deride genericalternatives?

Some have attacked Zynga's integrity for slacking off on user experience. This is a legitimate critique. However, it is a marginal one. The majority of Zynga's users are satisfied. Again, this is Chicagoan practicality. That is not to say Zynga should or does ignore individual issues. It is just to point out where the focus is.

Some have attacked Zynga for sending jobs overseas. What an incredibly selfish way to think about the overseas workers who need these jobs more than we do! America needs to unbundle employment to alleviate Marxian inefficiencies--and that is not a crisis created by Zynga.

Conclusion: Why To Buy Zynga

You don't buy Zynga for what it does now. You buy for what it could do in the future. That is how growth investing works.

The world is getting better. In an ideal world, do we have full employment? I don't think so. What is it that a lot of people would rather do with their time? Might they enjoy playing games with friends? See past the individual games, which can change from month to month. See the social force of games with friends. See the tenacity, audacity, and sagacity of Mark Pincus.

At its peak in a year of public trading, Zynga saw a Price/Sales high of 8. Since that peak it has moved tangibly forward in gambling revenue model development. However, it currently trades at a Price/Sales of 1.5. A gambling transition won't happen overnight, but as it does, the company's ability to make money will widen dimensionally.

States will legalize online gambling quickly to generate revenue for themselves. They will do it in waves to diffuse responsibility amongst themselves. Zynga will convert mainstream users to gambling as it has long shown itself capable of doing in pre-gambling.

Mark Pincus is the next Benjamin Siegel (Las Vegas visionary), the next Steve Jobs (obsessive tyrant), and the next Howard Schultz (experiential drug dealer).

Catalyst to watch: Google proves its power to counterbalance Facebook's monopoly in social media. This is inevitable, in my opinion, but the argument is too extensive to unpack here.

Source: 5 Myths Distorting Zynga's Supergeneric Potential

Additional disclosure: While Modernist has no plans to initiate any positions, plans can change in rare occasions. Family, friends, associates, and/or acquaintances of Modernist may or may not have positions related directly or indirectly to the contents of this article. Modernist may have unnamed positions related indirectly to the contents of this article.This article, like every article written by Modernist, does not constitute advice. The unexpected can and does happen in the stock market. Please utilize independent judgement in investment decisions.