Zynga (NASDAQ:ZNGA) has been trying to find new ways to improve its revenues over the last six months - some of its efforts have paid off, some are still in progress and some are likely to be less successful than others. The company recently announced its 1st quarter earnings of $0.01, with total revenue of $264 million, beating the analyst expectations.
Zynga has been trying to control its costs as it is clear the company is not able to support its falling revenues. However, future prospects are not as gloomy as predicted by some, and I see enough potential in the stock to consider it a buy at current levels.
Zynga has been able to sustain its 40% gain since the start of the year - in the meantime, the company has had a mix of good and bad news, which has impacted the stock price accordingly. As a result, the stock has been on a roller coaster ride since the start of the year, gaining over 60% at the start of March.
Mark Pincus, the Founder and CEO, had to make quick decisions as the stock receives center stage. The company has announced a wide array of bold decisions to counter the pessimism of anxious investors. However, analysts remain skeptical about the recommended changes. The focal point of the management is to tap all possible growth opportunities in the IT and Telecommunication industry. For this purpose, reinvestment of earnings and capital will play a crucial role.
Future Growth Prospects
The franchise division of the company has three games: "Farmville," "Zynga Poker" and "Words with Friends." All the three franchises provide Zynga with a stable source of income and a strong consumer loyalty. The company plans to expand operations of similar nature by coming up with more innovative and profitable online games. The management has launched a new strategy in the network division of "Zynga with Friends network" relying on the strong consumer base of Facebook users.
It plans to create a community of world-wide players, thereby increasing sales volume. The company in the last year has experienced a decline in profitability. Therefore, this year's agenda centers on increasing earnings through reinvestment and cost reductions. However, the company did not compromise its expenditure on advertising and sales network since it is the core source of investment for the company.
Another crucial undertaking employed by the company includes tapping the real money market by initiating a live version of Zynga Poker in United Kingdom and other strategic locations. In fact, the jump in the stock price at the start of the year was due to the company's prospects in the real money gambling market. However, it is still an untested territory, and a lot of players will be fighting for a small piece of pie - at the moment, the target market is too small to give enough space to these players to extract substantial benefit.
The company has decided to overturn a major setback it had experienced in the last year; decline in number of PC users. Zynga has announced to shift its customer-base from PC users to mobile users. The idea is to take advantage of the booming cellular industry. The company plans to launch user-friendly games for smartphones. The decision is expected to pay off in the near future and provide promising returns to investors. The company has experienced an increase in revenues of 22% from the mobile platform in 2012, as compared to 12% in 2011. Thus, the statistics reveal a great potential in the emerging market.
Zynga is a buy at current levels as I believe the company will be able to grow its revenues over the next two years. Cost cutting measures and new games will start to bring in substantial revenues to make up for the revenue losses from the older titles. Furthermore, we are likely to see real money online gambling expanding into bigger states, which will increase the market size substantially and give more room to market participants.
However, it should be kept in mind that the company operates in a highly competitive and volatile industry, which demands consistent innovation and reinvention - the users tend to get bored and switch to new games. Constant shifts in consumer preferences and technology pose a major threat to the company. Secondly, the company is subject to evolving legal regulations and standards imposed by the state and government agencies. The renewed contract with Facebook is expected to lead to low sales volume as Facebook becomes more stringent in its standard terms and regulations.
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.