When I first read that Zynga (ZNGA) was not going to apply for a US gaming license for now, my reaction was much the same as many other ZNGA hopefuls; ticked off and ready to lash out. Here I was, counting the days when the dollars began rolling in from Europe and the Zynga online business there, to catapult us (shareholders) into the rarefied air of at least a double or a triple of our cost per share when we bought it 4 months ago.
I even wrote some amazingly wonderful articles on how I felt this was the way Zynga would finally reward shareholders.
It all fell apart the other day when Zynga said it had no plans to pursue real money gambling in the US. Are they kidding me?
Then I took a few steps back and realized that this just might be the right move for the company to make for now.
Zynga Cannot Compete With The Big Dogs
The problem is that Zynga is not that well positioned to conquer online gambling, even with the European deal. To begin with, there is no regulated online gambling market in the U.S. Despite the efforts of Nevada Senator Harry Reid and others, it has proven to be very hard to push through any federal legislation in this area. If at some point legislation is passed, Zynga will be up against the largest "players" in the online gaming (and poker specifically) world.
I do not believe that companies like Caesars (CZR), MGM Resorts (MGM), and Wynn Resorts (WYNN) are going to let some little social gaming company, squeeze into the "final frontier" of gambling, without putting up a brutal fight.
These 3 companies alone have a combined cash on hand position of about $6 billion while ZNGA has only about $1 billion and with hardly any revenues to speak of so far.
How could ZNGA compete? That is the whole point, they cannot compete, and the company, with the new CEO Don Mattrick, realizes that the entire company can burn through its cash in a flash, until of course it begins generating meaningful revenue.
I believe the company already realizes that the deal with bwin.party is not likely to produce the $32 million in profits that bwin.party brought in by itself in 2012. As it stands, the company will not begin to see any revenues and profits until late 2014 or early 2015 as reported in this article:
James Cakmak, a financial analyst at the Telsey Advisory Group, generally agreed-and he was overall bullish on Zynga's prospects over the longer-term.
"I think you're probably looking at 2014 or 2015 before [this move is] reflected in [Zynga's] bottom line,......."I think it's a really good story right now, but I don't expect the bwin.party partnership to provide any meaningful contribution to the company's finances over near-term...."
With this particular view, as well as the fact that Zynga has failed to produce anything close to a success as of yet, I think this is a very smart decision.
As noted in the company conference call, the main disappointments are as follows:
- Revenue declined YOY by 38% even though earnings beat estimates.
- The number of folks actually paying to play games, dropped by about 53%, down to 1.9 million "players".
- Even though average daily usage increased by 14%, less of them are buying fake cows and little fake thig-a-ma-jigs right now.
- If the company cannot offer a social gaming platform apart from Facebook (FB), then further cash erosion is almost a certainty.
So What Is The Light At The End Of The Tunnel?
The fact that the company realizes it needs to fix its core business before fighting an uphill battle with some Vegas "big guns", is actually a step in the right direction. After all, ZNGA does have a very clean balance sheet, featuring the following:
- $1.12 billion in cash.
- Zero debt.
- A price to book value of only 1.49, which is quite low for a "growth" company.
- An enterprise value of $1.3 billion.
Now, why would I personally buy more shares right now? Because ZNGA understands that at the stage it is in, the money it does have, can be used in a more immediate way to produce revenue and profits; social gaming platforms and games.
Bringing in a new CEO that has an extensive track record in the social gaming business, is perhaps the first step in "righting" this ship. Not only that, but with the European real money venture getting underway, the social media gaming here in the states will give that business time to generate something "real".
With all of that cash, a new CEO who understands the world ZNGA lives, and the fortunate realization that real money gaming needs to be put on the back burner here in the USA, I actually feel even more secure in my decision.
Who knows? By the time the company gets its feet wet in Europe, maybe a bigger fish will gobble Zynga up anyway?
At $3.00/share, the stock seems like a bargain to me.
The Bottom Line
Zynga might not be the overnight double or triple we had been hoping for, but given the thesis I have presented, I feel the company and shareholders could see a significant rise in the share price.
It just might take awhile.
Disclaimer: The opinions of the author are not a recommendation to either buy or sell any security. Please do your own research prior to making any investment decisions.