Zynga Cuts Costs As It Focuses On Online Gambling And Potential Capital Appreciation

| About: Zynga (ZNGA)

I recently wrote this article in which I decided to add Zynga (NASDAQ:ZNGA) to the Young and Restless Retirement portfolio. At the time, the shares were selling at about $3.40/share and then dipped as profit takers moved in.

The recent positive news of Zynga having an early advantage in the online gambling world has now begun to take shape. In the most recent earnings conference call, David Ko, COO, stated this very clearly:

We remain on track to deliver our first real money gaming products in the U.K. in the first half of 2013. Together with bwin.party, we'll offer poker and casino games under the Zynga Plus Casino and Zynga Plus Poker brands, and we'll be rolling out these products in multiple phases across a range of platforms in the U.K., namely via web, download, Facebook, and if we choose, mobile.

In addition, we filed an application for a preliminary finding of suitability with the Nevada Gaming Control Board in December, a small first step toward participating in the U.S. online real money gaming market. These are all steps that are moving us toward our long term vision in real money games.

The commentary is very clear, and it is not often that a corporate executive places the company cards on the table quite so clearly. That being said, I suppose it is the responsibility of a COO to put their best foot forward.

In the interim, individual states are now heating up as noted in this report:

Gov. Brian Sandoval signed legislation Thursday legalizing online gambling in Nevada, capping a dizzying day at the Legislature as lawmakers passed the bill through the Assembly and Senate as an emergency measure.

Nevada wanted to beat New Jersey, its East Coast casino rival, to the online gambling punch. New Jersey Gov. Chris Christie previously vetoed an online wagering bill but has indicated he may sign an amended version next week.

With Zynga having an inside track, now seems to be the time for the company to put a full court press on taking center stage with online gambling right here in the US.

A speculative play at current levels could show impressive capital appreciation if the company's efforts pay off. The industry itself is said to be worth $200 billion by 2015. A slice of that pie could mean significant revenue and profits even if Zynga gains a 5-10% market share.

Today, in further efforts to consolidate the company and to focus resources on this obvious plan, Zynga announced the closing of several offices, as well as consolidating others, as noted in this Seeking Alpha Market Current:

Monday, February 25, 1:25 PM ET

Zynga's (ZNGA +10.3%) Baltimore office has been shuttered, and its NYC and Texas ops have been consolidated. The moves are the latest in a string of layoffs and office closings made by the social gaming leader as it copes with slumping bookings. Zynga's opex fell 66% Y/Y in Q4, with R&D spending falling 70%. (earlier)

David Ko had this to say in a statement released a short time ago:

"In an effort to leverage resources as we focus on creating franchises and driving profitability, Zynga has made changes to four of our US offices. We are closing the McKinney, Texas and downtown Austin offices and relocating those teams nearby to our existing Dallas and North Austin offices. And, we will be consolidating our NYC offices to move staff to our NYC mobile studio. Also, as a part of today's changes, the Baltimore studio will be closed. While these decisions are always difficult, these steps will affect approximately 1% of our workforce and enable us to focus our resources on the most significant growth opportunities."

As far as I am concerned, this is another step for the company to deploy available resources into gaining full entrance into the online gambling business. As Ko said; ".....focus our resources on the most significant growth opportunities."

Can you think of another growth opportunity that could push this stock to higher levels?

The Risks That Come With Speculation

While I might be emboldened about the potential for growth, the facts also must include the downside risks. Zynga has had nothing but problems since its IPO. Between the flurry of insider sales of shares (including those of the CEO), and the seemingly endless stream of exiting executives, ZNGA shares have fallen from over $15/share, to the current levels for very valid concerns.

If Zynga does not get licensed to participate in the online gaming business, or the laws in the US remain as strict as they are now, Zynga will continue to face an uphill battle.

There are also the major casino operations that will be fighting to get their piece of the gambling pie, so this is not a slam dunk by any means. Speculative plays rarely are, so as a prudent investor, please realize that there are plenty of risks, including the ultimate risk of losing your entire investment.

Keep that in mind when doing your own research.

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.