Zynga: The Prodigal Son Returns

| About: Zynga (ZNGA)

Well, we all knew this day was coming, but when had been in question. Yesterday, on February 21, 2013, Nevada's governor signed into Nevada law the first piece of legislation legalizing online gambling. Nevada force-fed the legislation through on Thursday in order to beat New Jersey to the punch.

The fight between Atlantic City and Las Vegas is not over here, however. Two days ago, New Jersey's governor was quoted as saying that he will quickly sign a bill legalizing online gambling in his state. Apparently, he is a man of his word, as according to his website, New Jersey has passed legislation of their own and is expecting it to be signed in the near future.

The question is, what does this mean for Zynga (NASDAQ:ZNGA)? ZNGA has taken a heavy fall since their December 2011 IPO and $16 high shortly after. The lack of monetization of ZNGA's online users and failure to adapt with the market to mobile usage has led to ZNGA's fall; it's currently trading at $2.96. With ZNGA focusing all efforts on international online gambling, however, this may soon change.

In Q4 2012, ZNGA had 56 million online users; however, monetization per user adds up to less than $10 apiece. However, online poker revenue, which ZNGA already had a firm foundation in with Zynga Poker, tends to generate 100x times free poker revenue per player. If this is not enough, ZNGA also has nearly half their market cap in cash at current prices. They are using these tools to change from a broken business model to one of profit while providing their users with the much desired real-money gambling platform.

If this is not enough, in ZNGA's most recent conference call, they explained how they would have overseas internet gambling up and running by early 2013. Online gambling is expected to generate nearly $200 billion in revenue in 2015, according to most estimates, and previously declared-illegal US poker sites, such as PokerStars, have generated more than $5 billion a year in the past. In Congress, Harry Reid is pushing forward a bill that he failed to pass in December 2012 because of a lack of time. Currently with bipartisan support and asking for 25% revenue taxes, this bill is seen as a partial fix for the US's debt crisis. Harry Reid has said that this bill is getting immediate attention, and it is only a matter of time that Congress sees the benefits to legalizing both US and international online gambling.

What about competition with ZNGA? The bill previously started by Harry Reid had a provision stating that poker sites that previously operated illegally would have to wait five years for reinstatement. Some sites will even be given the "death penalty" and never be allowed to gain approval. ZNGA, however, is a family-friendly and wholesome name that would be perfect for Congress to test the water with.


ZNGA, technically speaking, is sitting on an RSI around 50 and has previously bounced high off these levels. It is sitting on strong support at its 200MA and has the catalyst needed to confirm its chart. Its 1st level Fibonacci retracement line from its original high has still not been reached at $7.00, and I believe it will reach this in the near future. Previously in February, it exploded past $3.77 on news of legislation in New Jersey. It failed, and the stock fell greatly to where it lies today, but an amended portion of this legislation is set to pass, as seen in the link above.

With international gambling inevitable for 2013 and Nevada's passage of its own online gambling bill, as well as countless other states such as Pennsylvania and California revisiting online gambling legalization, ZNGA's current market cap is laughable. One thing is for certain: People like to gamble and will continue to. Until human nature changes, ZNGA will have the best business model, which is ironic considering how scrutinized their original model was.

Disclosure: I am long ZNGA. 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.