Future Growth Prospects Make Zynga A Buy

| About: Zynga (ZNGA)

Zynga (NASDAQ:ZNGA) has had a fruitful year after a dismal 2012, and the stock has gained almost 40% this year. Over the past year, the company has been on a losing streak; users started spending less time, crucial employees left the company and the profits took a big hit. All these events, however, have worked as a wake up call and the company has started to explore new options to increase revenue and earnings. As a result, the company has been able to restore investor confidence to some extent. Personally, I believe there are enough growth opportunities for Zynga to be a good long-term investment. I will try to discuss these future growth drivers in this article.

Real Growth to Come From Mobile

Mobile devices have become an integral part of our everyday life, and we are seeing a decline in traditional personal computers. As a result, most of the technology companies are focusing on the mobile market. Facebook (NASDAQ:FB) has already started to target mobile users to increase revenue from ads. It is not in the best interest of Zynga to rely on Facebook only for future revenue growth. The company needs to exploit the mobile space on its own. It was the third-quarter of 2012 when the company realized it had to focus more on mobile as more and more players were playing Zynga games from mobile devices. At the end of the last year, the company had 72 million monthly active users from mobile devices out of its total 298 million monthly active users. So, according to these figures, about 25% of Zynga's monthly active users are coming from mobile devices.

Last year monthly active users from mobile increased by 75%; if mobile users keep growing at this rate, the company will become a leading player in the segment. An increase in mobile users has clearly impacted the bottom line of the company, contributing 21%, compared to 8% last year. However, the remaining 79% was still contributed by Facebook. An encouraging statistic for Zynga is that it has the fifth-largest base of mobile users behind Google (NASDAQ:GOOG) and Facebook in the U.S. At the moment, a small number of games are generating most of the hits; Words With Friends alone generated 7.5 billion minutes of playtime in December.

Zynga is also going to launch Draw Something II, which will be more like a social network and allow the players to save their drawings. The ability of Draw Something II to engage users through its social network like experience will be vital for Zynga to attract more users. Furthermore, its new card-battling game "Ayakashi" is already becoming its highest-monetizing mobile game.

Online Gambling: How Will it Affect the Company?

Online gambling is largely banned in the U.S., and only three states have recently legalized it. The gambling industry has been lobbying and it has finally paid off. Online gambling will be a massive plus for Zynga as it has one of the most popular poker games. However, in order to effectively exploit this opportunity, the company will have to carefully choose a partner. Zynga has already partnered with Bwin Party to launch a real-cash online gambling game in the U.K.

However, online gambling will take some time to add to the cash flows of the company. At the moment, online gambling is legal in only three states, which are not expected to contribute heavily towards revenues in the short term. However, if other states follow and allow online gambling, the pool will become substantially larger. Zynga wants to target masses with its real-cash online gambling as it might be a little difficult to entice hardcore gamblers from real poker tables. In the short term, I do not see online gambling having a big impact on Zynga. However, in the long term, there will be substantial cash flow generation from this segment.


Zynga is making all the right moves for the company to grow well in the future. Emphasis on mobile and online gambling should allow the company to grow revenue and cash flows in the long term. Furthermore, a focus on cost cutting will also allow the company to improve its earnings. Zynga has scrapped some of the less productive games, and the company is also cutting jobs and closing down some offices. Another positive for Zynga is its expansion into the advertising business. Mobile advertisement is one of the most lucrative segments at the moment, and a solid position in mobile segment will allow the company to exploit this opportunity.

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.