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The Zynga (NASDAQ:ZNGA) story is one that has been played out over recent months. For a while it was viewed as a patient long-term investor's opportunity to seize inexpensive shares of a company whose stock price will ascend far beyond where it is now on the back of its real money gambling (RMG) ventures, coupled with its seemingly endless supply of cash ($1.12B according to Morningstar.com). Wall Street has been anxious to get a piece of the Zynga pie but weary of the probability and timeliness of their foray into RMG, this has been demonstrated by the notable jump in Znyga shares whenever any shred of positive news was announced over the last year.

On October 24, 2012 Zynga announced a partnership with UK-based bwin.party that will offer RMG online in the UK. Shares ascended 12.21% over the next two trading sessions. Good news? Sure. But gains over 12%? That seems rather rash and truly a representation of the underlying willingness of investors to throw money at the social gaming company.

The bwin.party induced euphoria quickly ended and returned to reality as the stock pulled back to its 52-week low of $2.09 in November. Shares continued to hover around $2.50 (with the exception of one large movement in late January which soon pulled back) until their earnings report on February 5th.

The company reported earnings of -$0.01 per share as opposed to the consensus estimate of -$0.04 per share. This sparked a jump of 9.12% percent as shareholders saw this as a step towards profitability, which when coupled with their eventual RMG income stream will make Zynga a winner.

The share price bounced from $3-$4 for the next few months as some investors were finally starting to drink the Zynga Kool-Aid, while others were wisely content with their modest profit and dumped the shares. Unfortunately for Zynga shareholders reality came knocking and on June 3rd, former CEO Mark Pincus announced massive job cuts throughout the company.

520 employees or a whopping 18% of their total workforce had been laid off as a result of cost-saving initiatives along with the closing of offices in New York, Los Angeles, Austin and Dallas. Pincus referred to the cuts as a "necessary step to move forward" and also claimed that the moves came from "a position of financial strength." Pincus' e-mail memo to employees can be found here. Michael Pachter of Wedbush Securities pointed out that investors are more concerned with the lack of incoming revenue rather than the savings made by these cuts.

Zynga's hero has arrived

Zynga then went on to suffer a month of poor performance in June, trading around the $2.50 level. That is, until those resilient Zynga owners had their prayers answered. Their knight in shining armor had arrived in the form of Don Mattrick. Mattrick's accomplishments within the gaming sector are highly documented as he is credited with a large portion of the success of Xbox 360 and Xbox LIVE during his tenure at Microsoft. Zynga announced Mattrick as their new CEO on July 1st and Wall Street reacted with the same over-exuberance that it has in the past upon hearing good news from Zynga. Shares rose 23.38% from June 28th to July 5th. (All share price movements found on Yahoo! Finance Interactive Chart)

Finally the Zynga bulls that had persevered through so much uncertainty have a light at the end of the tunnel, and that light was blinding. Between their tremendous cash position, their acquisition of Spooky Cool Labs (a company specializing in social casino games), their partnership with bwin.party and their superman Don Mattrick, Zynga seemed poised for a place among the stars.

Zynga shareholders were living a dream but eventually, they had to wake up. Much of Wall Street was blindsided as they intently listened to Zynga's Q2 conference call to see what kind of magic Mr. Mattrick had prepared. To everyone's surprise, Mattrick outlined Zynga's plan to avoid RMG gambling opportunities in the United States. Online RMG is beginning to slowly become legal throughout the States and investors believed Zynga would be in pole position to capitalize on this untapped multi-billion dollar industry as they had already begun to apply for licenses in states like Nevada where online RMG was becoming a realistic movement.

Shares quickly fell to the $3 area where they have hovered since. There is one problem remaining, though. In the past after Zynga's highly overpriced IPO when investors viewed the company as solely as social gaming play, shares commonly traded between $2.30 and $2.50. Of course as there has been all along, stubborn Zynga bulls remain. They point the still towering pile of cash Zynga is sitting atop, which makes up roughly 90% of their current assets as well as 47% of their total assets.

I just don't see where this cash will take them as their bookings (money spent by gamers on virtual goods in online games) and Monthly Active Users (MAUs) seem to be slipping. Competitor King sure isn't helping things with their hit game Candy Crush mesmerizing smart phone owners across the world (and inching towards an IPO). Introduction of a dividend is very unlikely as it is something that Zynga has never done and the word "dividend" wasn't even mentioned over the entire duration of the conference call.

Without RMG in the U.S., Zynga will rely heavily on their bookings for income. CFO Mark Vranesh stated on the company conference call that web bookings were down 44% year-over-year and 22% quarter-over-quarter while mobile bookings were down 12% year-over-year. In their Q3 outlook, Zynga is projecting $125 million to $150 million in bookings, which will be significantly lower than the Q2 figure that stood at $188 million. In terms of their full year guidance, Zynga is now projecting adjusted EBITDA margins 0% to 5% compared to the original projection of 0% to 10%; these number have been lowered "primarily to reflect lower bookings" (Vranesh). Also mentioned in the conference call, Zynga is looking at share dilution of 6% to 8%, which is higher than their targeted dilution of 4% or lower.

Conclusion

The stock has always fallen back to the $2.50 level during lulls between positive news releases and shares will be heading in that direction once again. Now that RMG is only a reality outside of the U.S. and revenue from bookings are falling, Zynga shares are poised for another drop. The company has returned to its original blueprint as a business that is primarily involved in social gaming. I see them falling back at least to the $2.50 level (a 14% fall from $2.90 where the stock is around right now) if not lower when shareholders finally realize that this stock's future growth has been diminished. Vranesh even stated on the conference call that they are "not happy with their results" so I advise you not to listen to the current Zynga bulls and look at what little future prospects the company truly has right now.

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.

Source: Zynga Shares Face Even Further Downside