Knowing When To Hold 'Em At Zynga

| About: Zynga (ZNGA)

After another disappointing quarter, investors are dumping Zynga (NASDAQ:ZNGA) for all the wrong reasons. The news that the company was not pursuing a gaming license in the U.S. for real-money gaming (RMG) was over focused on by the media. The stock dropped 15% after the news instead of focusing on the potential in the company to re-develop the social gaming dominance that is within reach.

The company is a leading provider of social games recently passed by as the leading social gamer on Facebook (NASDAQ:FB). While disappointing news, the growth in all of the mobile and social platforms should give Zynga investors hope that the future is stronger than expected even without the current potential of RMG.

Reviewing The Q2 Results

As expected, the Q2 2013 numbers were ugly though mostly better than expected. Revenue saw a huge decline as well as the active users that plunged during the quarter compared to previous periods. One bright spot was the sequential increase in daily bookings per active user.

The company reported the below highlights:

  • Q2 2013 revenue of $231 million, down 31% year-over-year, and bookings of $188 million, down 38% year-over-year.
  • Q2 2013 net loss of $16 million and adjusted EBITDA of $8 million.
  • Daily active users (DAUs) decreased from 72 million in the second quarter of 2012 to 39 million in the second quarter of 2013, down 45% year-over-year. On a consecutive quarter basis, DAUs were down 24% from 52 million in the first quarter of 2013.
  • Average daily bookings per average DAU (ABPU) increased from $0.046 in the second quarter of 2012 to $0.053 in the second quarter of 2013, up 14% year-over-year. On a consecutive quarter basis, ABPU was up 6% from $0.049 in the first quarter of 2013.

While the numbers especially around revenues and users were horrible, the company has a loaded balance sheet with $1.5 billion in cash and a new CEO that can hopefully turn around the franchise.

Real-Money Gaming Misunderstood

The key to the RMG announcement is that the company is not pursuing a domestic license at this point. While disappointing to investors hoping for a huge income stream from the Zynga Poker franchise, the more important news is that in several states the company is now required to partner with a land-based casino. The reality is that the sector faces a ton of regulatory issues and the company might have a plan to partner with a major casino and gambling firm that already has a license.

More importantly the company is still working on testing RMG in the United Kingdom and will continue to evaluate all priorities against the growing market opportunity in social casino games. The purchase of Spooky Cool Labs LLC and the poker franchise will combine to provide the company an easy transition into RMG when the opportunity is profitable.

Mobile And Social Potential

Instead of jumping feet first into the unknown abyss of RMG, Zynga is instead focusing on improving the existing mobile and social games that have growing and well-defined platforms to utilize. The company already has several established franchises in Zynga Poker, Farmville and Words with Friends that should provide some ability to promote new games.

The most important stats on the earnings release were the ones surrounding the growth in the gaming platforms while the company saw a massive decline in revenue. See below:

  • Google (NASDAQ:GOOG) reported that Google Play May purchases were up 700% over last year.
  • Facebook reported Q2 payments revenue up 11% over last year.
  • Apple (NASDAQ:AAPL) reported payments to developers over the last 12 months were up 120%.

These numbers highlight the reason the new CEO wants the company to focus on the social gaming sector and the identified $9 billion opportunity in that sector.

Bottom line

Zynga's stock was hammered after the earnings release as a lot of hot money had entered the stock hoping for some monumental news on RMG. Those traders were forced out as the company shifts priorities for now. The real news should be that the potential for social games is as strong as ever and the company has a cash hoard to turn around its franchises and develop new ones. With an enterprise value of only $800 million, Zynga provides a unique opportunity with the potential homerun of RMG down the road when that regulatory environment is clearer. Investors should hold on to the stock for now.

Disclosure: I am long AAPL, ZNGA. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.