News that Zynga (NASDAQ:ZNGA) is tightening its proverbial belt sent the stock plummeting recently. The company announced on June 3, that it would be cutting 520 jobs, or around 18% of its global workforce, and closing several offices. The company is estimating that these efforts should save it $70 million to $80 million annually, but Wall Street was not encouraged. The news pushed the stock from a high that day of $3.44 to a low of $2.87.
Online gaming company Zynga has recovered a little -- it is currently trading at $3.00 a share on a 52-week range of $2.09 to $6.36 -- and consensus estimates put the company's share price at $3.92 in the next year. While that figure relies heavily on analyst opinion before news of the layoffs, I think that Zynga will still reach its current one-year target estimate, if not surpass it.
In fact, I am more encouraged post-layoffs. Here's why.
Zynga is the company behind such popular online games as Words with Friends, Farmville, and Draw Something. It currently boasts around 250 million active monthly users, making it the leading social game company in the world. The company's Farmville franchise is performing well; other titles, not so much. But, Zynga has recently entered real money gambling with titles ZyngaPlusPoker and ZyngaPlus Casino.
By taking the drastic measure of laying off almost 20% of its workforce, Zynga is making sure it still reaches its full-year 2013 outlook for revenue, EPS, and adjusted EBITDA. It is kind of like someone who just lost his job selling his car so he can reduce his monthly overhead and, in so doing, preserve his financial position rather than resorting to credit and hoping the situation turns around in time. In other words, it is a fiscally responsible move and one which points to strong management.
This move also allows Zynga to concentrate its efforts on where the money is, namely Farmville and real money games ZyngaPlusPoker and ZyngaPlus Casino. And make no mistake the market is huge. First, there are mobile players, which grew at a rate of 75% over the last year, making up roughly 25% of the company's total active monthly users. Granted, that rate of growth is not likely to continue but there is still room to run. Even if the rate of monthly active declined at a half rate, that would still mean growth of almost 40% this year and nearly 20% next year -- clearly nothing to sneeze at.
Secondly, there is the issue of online gambling.
Online gambling is bound to be a cash cow for Zynga. The company is looking to offer real money gambling on a variety of platforms and make those services available worldwide in whatever markets are regulated, meaning that even currency won't be an issue. While online gambling appeals to a completely different person than one who likes to sit in a casino for hours, the fact of the matter is that there are thousands of people who have access to Zynga on one of its many platforms but who do not have a casino nearby. If they want to gamble, where are they going to go? Online, of course.
Now consider that Zynga is a well-developed platform. It has been in the social game space from early on. Online gambling users are going to want an attractive and easy- to-use format. Zynga is more likely to be able to provide that than a newer company. It has already worked out many of its kinks and refined its offerings to be user-friendly.
So, the real question remains -- is Zynga a buy?
I say yes. Even with the brief sell-off, Zynga has still returned over 25% year to date, through the end of trading on June 3. As online real money gambling gains a foothold and the number of mobile users continues to increase, I think we are going to see big things from the online gaming company. Buy in now for long position while the share price is still low.
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.