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Last month we analyzed the winners and losers in the Social Media Industry and recommended a bearish stance on Zynga (ZNGA). We had serious doubts about Zynga's ability to monetize user growth, as the average booking per user only grew by 7% YOY in 1Q2012, despite a 23% YOY increase in Monthly Active Users (MAU). Plus, we also found out that consumers were losing interest in games developed by Zynga, as the growth in Monthly Active Users was slowing down. The stock has fallen nearly 25% since we recommended selling Zynga last month.

ZNGA is currently trading near its 52 week lows. Amazon's (AMZN) entry into the virtual multi player gaming space and concerns regarding heavy revenue dependence on Facebook (FB) have the major concerns for investors.

Zynga makes most of its revenue from selling virtual in-game goods to users. Some of the revenue also comes from advertising. Zynga's online games are popular among users, and seven of the most popular online games out of the top ten are developed by Zynga. Main rivals of Zynga are King.com, Electronic Arts (EA), and Wooga. More than 95% of Zynga's revenue comes from Facebook users.

The company was ale to beat analyst estimates for 1Q2012 as the social gaming market grew by 39%. Its is expected that social gaming market will grow to $9 bn from $5 bn at present. However, ZNGA might not be the best play on social gaming because of increased competition.


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Zynga is continuing to record a fall in the number of monthly average users of its games. As can be analyzed from the above comparison figures taken from appdata.com, Zynga's popularity is falling in comparison to king.com and EA.


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Moreover, all old games, except the new Bubble Safari, are showcasing declining popularity among users, as the number of Monthly Average Users for each game has continued to fall in the past one month. Monthly Average Users for Draw Something, the game developed by OMGPOP, have decreased from 28 million users to 20 million in the span of one month.

Price

4.86

Market Cap

3.69B

Enterprise Value (Jul 13, 2012)

2.63B

Forward P/E (fye Dec 31, 2013)

13.94

PEG Ratio (5 yr expected)1:

0.83

Based on our analysis, we are quite doubtful about Zynga's future growth, and believe that the company's growth is going to gradually fall starting from next quarter's earnings. Therefore, we firmly reiterate our sell stance on Zynga. The stock has fallen 48% since the start of the year, but we believe that the market has not priced in the declining growth trajectory for Zynga. Analysts have not revised their outlook on Zynga in the last two months. Therefore, we believe that analysts have not incorporated the declining growth for Zynga in their earnings estimates, and we will see analyst downgrades soon. The stock is trading at 14 times' forward earnings, and in our opinion, is expected to fall as the market realizes Zynga's slowing growth. The valuation will look much more expensive as analysts cut down the earnings estimates.

Source: Sell Zynga: User Interest On The Decline