Zynga (NASDAQ:ZNGA) has been on a steep decline since March, and the stock has come down from $5.75 in March to $2.85 - this shows a decline of more than 50%. The stock had been doing well in the previous months, and the stock had recorded a considerable gain. However, as the company has been unable to maintain momentum and translate the strategy into financial results, the stock has been falling. It looks like investors are losing faith in the company, and the recent selling pressure has created an opportunity for traders and speculators. In this article, we will take a look at the company's revival strategy and business plan to figure the possibility of good financial results in the future.
Lower Expectations might be a Good Thing
Last week, the company announced disappointing earnings for the second quarter. With bookings of $175 million, the company fell short of analysts' expectation by 8.3%. While revenues for the quarter were $153 million, which is also a huge decline as compared to the last year's figures. The poor performance of the company led to a net loss of $62.5 million, a substantial increase as compared to a loss of $15.8 last year. As a result, Wall Street has now lowered its full-year expectations, with bookings in the range of $695-$725 million, as compared to the previous expectations of full-year revenues of $770-$810 million.
However, this decline in consensus might be good for the company, as it lowers the expectation, and it might be easier for Zynga to meet the reduced expectations. The lower full-year guidance might also give some support to the stock price, if the company is able to meet/better the full-year expectations. Zynga hitting bookings of $725 is more likely than reaching bookings of $770. So, if anything, the lower expectation of the market has given better chances of stock price growth in the future. However, we cannot ignore the actual prospects of the company, which will be important for the long-term growth of the company.
Would the Revival Strategy work?
A huge factor behind Zynga's early success was Facebook (NASDAQ:FB). Through FarmVille and Mafia II, the company made a fortune using Facebook as a platform. Unfortunately, those days are over. And while people may want to spend time on Facebook, Zynga has no alliance with it anymore. Without the social media platform, the company has not been able to show the same level of success - it looks like the company is failing in creating the "network effect" - network was an important factor in bringing success for games like FarmVille, Zynga Poker and Mafia II.
In order to make up for this decline in the use of games, the company has focused on mobile devices, which would certainly result in increased use of its games, as mobile devices are mainly being used for gaming. Zynga was a little late in focusing on the mobile devices market; however, it might still be possible for the company to growth through this market.
Zynga recently announced deals with Warner Bros., Tiger Woods and NFL to offer sports games on smartphones. It is a curious deal, as sports gaming on smartphones has a limited audience, according to the Entertainment Software Association - it shows that the company is trying to target even the smallest segments of the market. The most preferred games on mobile devices are casual and social games, and puzzle, board and card games - both of these categories accounted for 70% of the total. The following pie chart shows the actual statistics from the last year.
Based on the statistics, the company may have a better chance at winning with New Zynga Poker, since similar games are one of the most played on the list above. The company has delayed the launch of its two upcoming games, one of which is the previously mentioned New Zynga Poker, and the other is New Words with Friends, a puzzle game. Both of these games have a huge target audience.
As I mentioned at the start of the article, the steep fall over the last few months has made Zynga a good speculative bet. Investors with high risk tolerance can consider Zynga, as the company continues to make moves in the mobile gaming segment, and patient investors might benefit if Zynga is able to grow its mobile gaming segment. Furthermore, it will take some time for Zynga to create the network effect, as a number of people do not like to be at both the sites, Zynga and Facebook. However, investors with low risk tolerance should stay away from Zynga, at least until the current strategy of the company starts to show some progress.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.