2 Gaming Companies Aiming For A Turnaround; Which One Will Succeed?

Oct. 7.13 | About: Zynga (ZNGA)

Not too long ago, Zynga (NASDAQ:ZNGA) was considered to be a company with great upside potential. But, times have changed and a few bad decisions by the company's former CEO Mark Pincus sent Zynga into a downward spiral. The company has failed to develop games that have attracted massive interest and this has ultimately led to a decline in its users as seen below.

Number of Users in Q2 2012

Number of Users in Q2 2013

Monthly Active Users (MAU)

306 Million

187 Million

Daily Active Users (DAU)

72 Million

39 Million

Monthly Unique Users

192 Million

123 Million

Click to enlarge

As it is evident from the above table, the number of users has nosedived by a large margin in just one year. The waning popularity of the company's previous blockbuster franchisees like Farmville and the inability to generate excitement through new games have been the major culprits behind this decline. This decline in the number of users led to a terrible quarterly performance, which added to the woes of shareholders. In the previous quarter, Zynga reported a plunge of 31% in its top-line while bookings also tumbled 38% to $187 million. The company also posted a net loss of approximately $16 million.

To turn around its fortunes, Zynga brought in a new CEO -- Don Mattrick. But, will this arrival lead to a reversal of fate? It may revive Zynga, but since Mattrick has prior experience in the PC and console gaming market only, it is yet to be seen how he performs in the mobile and social gaming industry.

Mattrick's glorified history

It is widely assumed that in his previous tenures with Electronic Arts and Microsoft, Mattrick was quite successful. During his time at EA, Mattrick was in the limelight for working on the development of chart-topping games such as Need for Speed, The Sims, and FIFA. Mattrick was widely praised for the development of these games, but these games were merely continued franchisees and Mattrick wasn't responsible for making any severe changes to these franchisees.

At Microsoft, Mattrick was overseeing the Xbox 360 and PC gaming. During his time, Xbox witnessed an increment of 66 million in its user base worldwide. Mattrick's tenure at Microsoft was quite successful, but then he messed up the deployment of the next-generation console Xbox One. Xbox One has been bullied in pre-order sales by its primary rival- Sony's PlayStation 4 - and Mattrick's decision to enforce five unwise features onto users was largely responsible for it. The bungled up launch of the new platform is considered as the primary reason why Mattrick jumped ship from Microsoft to Zynga.

Implementations at Zynga

Shareholders of Zynga were beaming with joy when Mattrick was appointed the CEO of the company, but the happiness turned out to be short-lived when the company announced that it won't be pursuing real-money gaming in the U.S. Following the success of the company's real money gaming business in the United Kingdom, investors were anxiously waiting for the arrival of real-money gaming in the U.S. and passing an opportunity like this doesn't seem sensible.

Mattrick has also followed the "My way or highway" approach by announcing a large scale management shake-up, which saw three of the company's top-level executives being sacked. The company has also cut off 18% of its employees as it continues to execute its extensive cost cutting initiatives. Although this overhaul indicates a fresh start, Mattrick may be doing it too quickly and the new employees may not gel in as fast as he wants.

In addition to that, Zynga acquired Spooky Cool Labs LLC, and shut down OMGPOP, which it acquired for $200 million less than a year ago. With analysts claiming that Zynga lost roughly $528,000 daily in this agreement, this step was predictable.

Even though Zynga lost huge capital in this deal, the company still has $1.5 billion in cash with no long-term debt. With such a huge amount of cash in hand, Mattrick can experiment with the company's offerings and a couple of setbacks shouldn't really matter.

Better investment options

The saga of Glu Mobile's (NASDAQ:GLUU) struggle over the past year has a resemblance with Zynga. The company has struggled to boost it margins and posted a net loss of $2.5 million in the previous quarter. Though Glu has been one of the leading mobile gaming companies, shareholders have been burnt badly as the company's stock price is down 32% year-to-date.

Over the past one year, Glu's games have been unable to keep gamers glued to their mobile phones. But, the company may have delivered a winner with its new game called Deer Hunter 2014. According to AppAnnie.com, the blockbuster game has reached the zenith of the iOS charts for free games download in less than a week of its launch.

Glu is a freemium game developing company and the technological advancements that have been put into use in this game will enable it to drive its in-app sales. Deer Hunter 2014 will allow additional social interaction among gamers and since they'll be competing against each other, they'll be looking to improve their gaming performance with the help of these in-app purchases. This new development increases the probability of in-app purchases and the company will integrate this technology into many of its upcoming games in the next quarter.

Conclusion

With earnings expected to grow at a CAGR of 30% over the next five years, Glu Mobile looks like a better bet right now. The company's latest game seems to have brought it back on track and it is looking to drive in-app purchases going forward to generate more revenue. As far as Zynga is concerned, it might be some time before Mattrick is able to effect a turnaround. The company's initiatives and plans look good, but until and unless there are concrete results, investors should stay on the sidelines.

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.