Why Zynga Is Still Not A Buy

| About: Zynga (ZNGA)

On my last article on Zynga (NASDAQ:ZNGA), my opinion was that the stock offered no catalyst to rally, because gambling revenue would not be something to look forward to until the calendar year 2015. And because 2015 is still very far away, we cannot encompass that element into the stock at the current time. Second, there is not much positive guidance from Zynga pertaining to the future profitability of the company at the current time. As a result, I really don't see much happening with the company and no reason why the stock at the current time should rally.

In other words, with the exception if you are a long-term buy and hold investor, I see no reason to buy the stock at the current time.

Well after that article, the stock did rally a bit, but hit a wall at the $3.70 level and then dipped all the way down to around the $2.90. But then, it really surprised me going all the way to $4! What a roller-coaster ride. Since then, however, the stock has settled back to the $3.40 level and is currently on a technical downward path.

So let me reiterate some of my key points from previous articles on Zynga and why it is still not a buy:

  • The social gaming business for the time being is not really producing much profit for the company.

  • In the mean time, there is little in terms of news that can excite investors about the stock, except for the fact that the company will be entering the real money gaming space.

  • As per that space and the Nevada gaming license the company has applied for, Zynga said it is "simply positioning itself for legislation that would permit online gambling in the future" and it is not expecting any revenue from this activity anytime soon. In fact, it does not expect anything to happen for all of 2014! Which means if and when we get any news from this side of the business, it will probably be in 2015.

  • As per the partnership between Zynga and bwin, Zynga has said this was an "exploratory opportunity." Zynga entered this partnership to learn the business than anything else. The earliest date that we can expect any kind of surprise will be in Q3 of this year. But from the looks of things, I think we have to wait for Q4 of 2013 or even Q1 of 2014 (at the earliest) to get a better picture of what this partnership might yield and at what kind or price tag we can add the stock.

So my current recommendation stands as follows:

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Since I am not expecting a surprise in the near term, I think the stock will be trading in a range for many months. So if you are short-term oriented, I would be a buyer if the stock dips towards the $3 level, because I think this company is a good long-term value. I would also sell if the stock traded around $3.70.

I think the $4 level was an incident of irrational exuberance, and traders had no reason to bid it up that high. Finally, I think the next time we will see this stock at the $4 level will be when we have rock solid good news of the company's gambling activates, or if it surprises us in any way.

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.