Zynga: Future Prospects At Play

| About: Zynga (ZNGA)

Zynga's (NASDAQ:ZNGA) fourth quarter results were not speculator, but they were better than expected. Highlights for the fourth quarter and full year ended December 31, 2012.

  • Full year 2012 revenue of $1.28 billion, up 12% year-over-year, and bookings of $1.15 billion, down 1% year- over-year

  • Full year net loss of $209 million and adjusted EBITDA of $213 million

  • Full year 2012 GAAP EPS of ($0.28) and non-GAAP EPS of $0.07

  • Q4 revenue of $311 million, flat year-over-year, and bookings of $261 million, down 15% year-over-year

  • Q4 net loss of $48.6 million, down 89% year-over-year, adjusted EBITDA of $45 million, down 34% year-over- year

  • Q4 GAAP EPS of ($0.06) and non-GAAP EPS of $0.01

Analysts were expecting an adjusted loss of 3 cents a share on revenue of $212.1 million, according to consensus estimates. However the current quarter is not the issue and investors should not put much weight on it. It's the future that matters and it's becoming more clear that the company is in the right direction. Let me explain.

Real Money Gaming update

As I have said in the past, while social gaming will continue to be a good business and will hold its own weight, I don't see much money in it. I mean there is a chance that the company will come up with something really revolutionary and hit it big, but I am not "betting" on it. My longer term value thesis for Zynga lies with the company's entrance in the real money gaming business. As such, the company is progressing more and more in that direction, even if several games recently introduced are non-money games for the time being.

In the social casino genre, bold beats were introduced in Zynga Poker. In Q4 the company introduced multiplayer tournaments in Zynga Poker, bringing together thousands of players in massive online tournaments. Zynga also launched Poker Genius, a tool designed to help players who are not poker experts but want to feel like one. The tool, which makes users better poker players, has had an adoption rate of 80%. Zynga also launched Ayakashi in Q4, a card-battling game that is now the highest-monetizing mobile game on a per-user basis.

In social casino, Zynga Poker continues to lead on Apple (NASDAQ:AAPL) IOS, and Google (NASDAQ:GOOG) Android platforms. In the fourth quarter poker users grew to 37 million monthly active players, up 8% y-o-y. In 2013 the company will also introduce Elite Slots, which is currently in beta. Finally, in the first half of the year, Zynga will be launching a full suite of real money casino games in the U.K. (here and here), through the previously announced partnership with BWIN (OTC:PYGMF).

Also not to be discounted is the fact that the company has on average 298 million monthly players, with 72 million on mobile. In December, according to the company, Zynga mobile game players in the U.S. spent more time on the company's mobile games than the next five game companies combined. According to comScore (as per the company's report), Zynga has the fifth-largest daily audience in mobile in the U.S. and fifth in overall time spent on mobile, with 10.7 billion minutes in December 2012.

Finally, in December the company filed an application for a preliminary finding of suitability with the Nevada Gaming Control Board. This I think is the No1 item to look out for, and I think it will be the catalyst of all catalysts, if and when the company introduces real live money gaming in the U.S.

So why was the stock up about 7%?

Well like I said in the beginning, the results were a little better than expectations, but I am not putting much weight on that. I think that the main issue is that the fundamentals of the company have stabilized and have not deteriorated as previously thought by many analysts.

Second is the transformation to mobile. As more and more of the company's business is done on Mobile, more and more Zynga will become independent from Facebook (NASDAQ:FB). In fact, as more people play on the company's own site and on mobile, the less revenue Zynga will have to share with Facebook. I would not say that Zynga will be 100% independent of Facebook anytime soon, but it is a step in the right direction. This is also the reason why the company said that it has very high hopes for its ad business over the next few years.

The balance sheet also has remained quite solid with cash flow generated for Q4 of $30 million and $119 million for all of 2012.

Finally, I think the market is looking ahead to how the company will perform in the on-line real money game space. 2013 will be a transitional period for the company, not only in terms of real money games, but also because the company's restructuring efforts are paying of.

As long as the company's balance sheet remains healthy and the company is not burning cash, all investors have to do is wait for Zynga's real money games to commence. And if the company is successful, then I think patient investors will be more than rewarded.

As such, I still have a positive stance on the stock, but will have to see what happens over the next two quarters to evaluate further.

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On a technical side-note, the stock broke above the previous resistance levels we talked about in my previous take on the company (all my Zynga logic here). Volume was pretty solid and as such I think resistance has been taken out. The next resistance level is around $3.40. I think we will need solid news before we take out those levels.

For swing trade investors, if the stock reaches $3.40 soon, I would sell and wait for some good solid news. If you are a longer term investor, my advice is to do nothing and hold onto the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.