The days of Zynga's (ZNGA) dominance in the online gaming world have long passed. Zynga's core games, including the Ville franchise, which comprised more than 30% of Zynga's online game revenue in the second quarter 2013, continues to lose users on a monthly basis. Monthly Average Users (MAUs) continue to decline on a monthly basis and the 127 million MAUs the company once enjoyed in 2009 represents the peak of the company's popularity. It has been downhill ever since.
But wait, the downside is limited
According to Evercore Partners, Zynga's cash and real estate assets represents $1.93 and $0.38 per share, respectively, providing shares with a theoretical floor price of $2.31. Zynga's shares closed Thursday's trading session at $3.02, implying an enterprise value of $0.71 per share, or ~$565 million.
While the company has been through a rough period which includes changes in upper management, and a mass firing, it would be incorrect to state that Zynga should have no enterprise value. A revamped management team and the possibility of maybe, just maybe, a popular game release, dictates that Zynga's talent pool, assets, and industry experience must have some value for shareholders.
Just need to replicate Candy Crush's success
In 2013, King, a casual game developer, and competitor of Zynga, released a highly addictive game called Candy Crush Saga which has amassed nearly 50 million users. While many see King as a threat to Zynga's hopes of creating the next big game, there really isn't anything standing in the way of Zynga to develop such a game. Candy Crush has generated more than $300 million for King on an annualized basis ($850,000 a day) which shows that the market exists where consumers are paying for games. If anything, King's success shows the existence of mobile gaming monetization for the entire industry. Candy Crush is a fresh game with hundreds of levels of varying difficulties, a contrast to repetitive nature of Zynga's FarmVille or Words with Friends.
While it isn't worth repeating again that Zynga has been losing significant market share, King's rise to supremacy shows the potential upside Zynga could see if their next line of games prove to be a success. A few short quarters ago, King was a relative unknown, so it is reasonable to assume that a popular new launch could result in a very significant boost for Zynga, which can allow the company to regain share very quickly.
The importance of mobile
Janney Capital Markets estimates the social games market will grow to $13.9 billion by 2015 (compared to $9.8 billion in 2013) as consumers will favor mobile games with a combination of free to use and option to purchase in game upgrades instead of paid apps and traditional desktop games. The company's former CEO, Mark Pincus fully understood the importance of mobile and had this to say in 2009:
The iPhone has most of the components to be one of the most important social gaming platforms. It has ease of access through the App Store, where games are even more accessible than on a social network... It's social, and it connects online easily. And, of course, it's always with you, so the games are always available for you to play. We believe social games will penetrate the iPhone more than any other platform.
The understanding of industry trends didn't translate to positive results under Pincus' watch. Just because Pincus understood the importance of mobile, doesn't mean he acted on it. During the company's second quarter 2012 conference call, chief financial officer David Wehner stated that:
Words with Friends and Draw Something, our two most popular mobile titles, monetise at a lower rate than our most popular titles on the web.
The solution to Zynga's woes can potentially be solved with a new CEO. New management, especially Don Mattrick, a former Microsoft Xbox chief is a great long-term catalyst to bring in new ideas, strategies, narrow focus, realign costs and exploit new sources of revenues through potential ad sales and partnerships. As head of the Xbox unit at Microsoft (MSFT), I believe Mattrick made several blunders which facilitated the migration from Microsoft to Zynga, but a fresh start at a fresh company can do everyone good. Mattrick wanted Microsoft to buy Zynga back in 2010, which shows that Mattrick has been following the company closely from an outside point of view and certainly has a lot to bring to the table.
With the company's strong balance sheet and theoretical floor of $2.31, certain investors might find shares of Zynga attractive at current prices for the long term. The company certainly has ample money to cope with prior mistakes and short term headwinds.
I think investors should enter Zynga with a smaller initial investment and add to shares if there is a pullback. While it is possible for Zynga to release a hit game in the coming months, the pessimistic view is that Mattrick will need at least a year to turn the company around. Investors that have the patience and the willingness to give Mattrick and Zynga a second chance at success can potentially be rewarded with future gains over the coming years.