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After Thursday's monster run up in shares of Zynga (NASDAQ:ZNGA), the stock is now trading over 52% higher than its original IPO price. Currently shares are trading at 55.7x 2012 EPS estimates of $0.26 per share, by no means a cheap or reasonable valuation, especially for a company with a core business that's actually in decline.

That's right, Zynga's main business of monetizing its games by selling users things like 'coins' and 'points' actually has been seriously stalling since the beginning of 2011. For Q1 2011 Zynga recorded $286.6 million in bookings, in Q4 2011 that number was just $306.5 million (after two weaker quarters in Q2 & Q3), an increase of just under 7%. 'Experts' will blame this on the seasonality of Zynga's business, saying that Q4 is usually the weakest (which logically would make no sense since Q4 is during the winter when people have more time to play games online) but in 2010, Q4 was by far Zynga's strongest. In fact, from Q1 2010 to Q4 2010, Zynga's bookings grew by over 35%, far stronger than the 7% shown in 2011. This is all despite the fact that Zynga released its 'blockbuster' game of Castleville, which in reality just stole players from its other big franchises (like Farmville and Cityville).

To support this evidence of weaker growth throughout 2011, is a report by IHS stating that at the end of 2010 about 50% of Facebook's (NASDAQ:FB) users were playing online games, and at the end of 2011 that number fell to around 25%. This is almost indisputable evidence of the fact that gaming on Facebook is just a fad, which has almost passed.

The reason behind Zynga's massive run up recently is because of its announcement about Project Z, which will allow it be disconnected from Facebook. There are numerous problems with Project Z, first off the reason people played Zynga's games was because they were on Facebook already. Their games were accessible and all their friends were playing too, the only motivation to move to a completely new platform would be because the games were that good. Just because Castleville is the number one game on Facebook does not mean it will be the number one game on the internet by any means.

Let us also recall that Zynga did a little experiment in the past to dislocate itself from Facebook, it was called Farmville.com, which failed miserably. Project Z is nothing new, it's just the same games, which data is showing less people are playing.

Now forget about revenue or Project Z, let's look at MAU's (Monthly Active Users) which actually declined from 266 million at the end of Q3 to 225 million at the end of Q4. This is just further evidence supporting the fact that Zynga's games are just a fad. Zynga also boasts that it not only has the top game on Facebook, but the top 5 most played games on Facebook. This means that Zynga is almost solely responsible for the serious decline in gaming on Facebook!

Then let us gloss over the problems with management's compensation, which may actually be the biggest of the cockroaches. In 2011 Zynga paid around $600 million in stock-based compensation, which took operating profit negative. Contrary to popular belief this was not a one-time deal, in 2012 Zynga is expected to dish out another $425 million in stock-based compensation, which will once again make operating profit negative. Another added negative to giving out stock-based compensation is that it will probably be sold into the open market, which would explain the additional 35 million shares being added to the O/S in 2012.

Overall the hype of Project Z has produced an excellent opportunity for rationally minded traders to take advantage of the exuberance surrounding already overvalued Zynga shares, and short the stock.

Source: Project Z Or Not, Zynga's Future Looks Bleak