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Two months have passed since I first outlined the premises of my bearish thesis on Zynga (NASDAQ:ZNGA), and since then the stock has declined about 45% from $14.48 to $8.00 per share. This sharp decline can be attributed to the market rationalizing the limited potential of Project Z, and a realization of a serious slowdown in revenue growth.

To outline the recent significant slowdown in Zynga's growth, here is a quick look at sequential quarter over quarter revenue increases.

Quarter Over Quarter Growth
QuarterRevenueGrowth From Prior Quarter
Q4 2010$195,759-
Q1 2011$242,89024.1%
Q2 2011$279,14014.9%
Q3 2011$306,8299.9%
Q4 2011$311,3271.5%
Q1 2012$320,9703.1%

As you can see, in each of the past two quarters Zynga's growth has come to a screeching halt. Forget the massive year over year growth Zynga reports in its press releases ("Q1 revenue up 32% year over year"), what matters is the serious slowdown in sequential quarterly revenue.

Current analyst estimates are pegging sequential revenue growth at 7.1% from Q1 2012-Q2 2012, and 9.7% from Q2 2012-Q3 2012. These numbers would indicate a serious reversal of the current trend, and a continuation of 20-30% year over year growth. But I believe these expectations will be very hard to meet. Let me explain:

Zynga has a history of reporting excellent Monthly Unique User (MUU) numbers since going public. In Q4 2011 Zynga reported 153 million MUUs, in Q1 2012 that number jumped to 182 million, an increase of almost 19%. Ironically, as shown in the chart above, revenue only climbed 3.1%. The explanation behind this is most likely due to a drastic quarter over quarter decline, in average daily bookings per active user. Average daily bookings rose 8% year over year, but fell about 10% quarter over quarter. This reiterates my thesis from Part I about Zynga's core business declining.

Another interesting thing to note from Zynga's Q1 report is the serious slowdown in daily active user growth. Zynga's daily active users grew just 6% year over year in Q1, far slower than Facebook's (NASDAQ:FB) user growth. What is particularly worrisome about this, is that Zynga derives almost all of its revenue from a very select and active group of users. Daily active users is probably the most correlated statistic to this select group of revenue generating users (because people who play Zynga's games daily are the ones who are most likely to buy coins). Thus, if daily active user growth is slowing, we should assume average daily bookings are slowing as well. Interestingly enough, as previously stated, average daily bookings aren't just slowing, they are declining.

With Zynga's crucial group of paying users declining, I expect we will see a continuation of declining revenue growth and share price as well. Analyst estimates of much higher growth starkly contradict the trend of declining average daily bookings.

Although the bearish argument encapsulating Zynga remains very strong, the upcoming Facebook IPO could provide renewed exuberance in shares. Shorting Zynga will remain a very speculative play until after Facebook's IPO is done and the buzz surrounding it has significantly died down.

Source: Zynga's Future Looks Bleak: Part II