In our previous article "Zynga and Facebook Are In A Complicated Relationship", we explained why Zynga's (ZNGA) stock performance is highly dependent on the launch of new games and sites in the short run. We ended the article by exploring possible scenarios after the launch of ZyngaPlusPoker and ZyngaPlusCasino in the U.K.
The expected launch became reality last Wednesday, when Zynga released both sites to the public. In what follows, we analyze the new products and infer possible short and middle term effects on stock performance.
Event 1: Zynga released ZyngaPlusPoker and ZyngaPlusCasino on April 4th. These sites offer online poker, slot machines, blackjack and other gambling activities. It is the byproduct of a partnership with Bwin.party (OTCPK:PYGMF), the largest publicly traded only gambling company, based in Gibraltar.
Event 2: In an attempt to strengthen favorable expectations, Barry Cottle, Zynga's Chief Revenue Officer and EVP, stated that these sites are the mere prelude (a sort of initial browser version) to the introduction of something much bigger: the Facebook and mobile-versions of the games.
Immediate short run effect: As we predicted, stock was up hours prior and after the announcement. Stock was already up about 15% on April 3th.
Analysis: Not a real catalyst
We think that investors have overreacted to the announcement and we expect a slight correction in the next 2-3 trading days.
First of all, we are still waiting for the "social gambling" platform. We have the browser version now available, but there is nothing innovative about "another gambling website online". On the other hand, adding social gamification to the old concept of "online gambling" is a new idea that has only been explored partially. And if you add to this the possibility of leveraging Facebook's (FB) one billion users database, then you have a real catalyst.
If Zynga is going to make a big change in the online gambling industry, it is not going to be because they launch a couple of new gambling sites. Zynga could only make such a change possible by introducing a truly social gambling platform. We were and are still looking forward to it.
The 2 websites Zynga launched last week need important modifications if they are to become significantly successful, due to the following reasons:
1) You need to register to get going on the site. No Facebook or Twitter connection available at the moment.
2) They offer the possibility to download software, but at the moment there only appears to be support for Windows.
3) U.K. online gambling market is already very competitive.
Furthermore, even if Zynga launches a Facebook version for its gambling websites in the next weeks, it could already be "too late". Social casino gambling sector is already a hot topic for most serious developers. According to Data Analysts firm Kontagent (2012), in October 2011, the social casino games genre had a tiny 3% market share of the fastest growing social games genres in the Facebook platform. By June 2012, the social casino games genre had risen to 23% market share.
Needless to say, several companies have been active and not at all silent in their preparations to leverage the potential of the social gambling concept. In May 2011, Caesars Entertainment (CZR) acquired a 51% stake in social casino games developer Playtika. International Game Technology agreed to pay $500 million for social casino games developer DoubleDown Interactive. The list continues.
Indeed, those who see a lot of potential in social gambling are not wrong. According to research firm Gartner (2011), the social gaming population consists of 750 million players and is expected to double to 1.5 billion players by 2015. But those who translate the potential of the social gambling sector into immediate success for Zynga are fantasizing:
- Competition is already fierce.
- Even though Zynga holds 300 million users in its various games, most of them are not active.
- Most of them never used real money in their games.
- Even if 10-20% of these 300 million users register in the sites, they will tend to avoid using real money.
- There is absolutely no guarantee that previously successful brands like "Farmville" and its characters will attract gamblers.
- ZyngaPlusCasino brings players more than 160 slots games (Blackjack, Baccarat, and several others) but none of them are really new games.
Conclusion: Because of the above reasons, we expect a correction in the next 2-10 days. The launch of the Facebook version is the real catalyst, and even if such a release materializes in the next weeks, a consistent upward trend on stock performance is not guaranteed.
Trading Strategy: Buy after the correction materializes (in the next 2-10 days). Hold until the Facebook version of the gambling sites is launched (2-6 weeks). Sell 5-6 hours after the release.