Zynga's Bleak Future Part IV: This Bubble Has Popped

| About: Zynga (ZNGA)

Throughout the past 4 months I've chronicled the Zynga debacle (See Parts I, II, III). Wednesday afternoon I got my trophy, and it happened to be in the form of CEO Mark Pincus sputtering through Zynga's 2nd Quarter (Q2) report on my Macbook.

Yesterday after hours, Zynga reported Q2 revenue of $332.5 million ($11.5 million below estimates), along with substantially weakened 2012 EPS guidance. The result of this has been a ~30% decline in Zynga's stock price.

And it only gets worse from there.

Below is an updated table from Part II detailing Zynga's recent quarterly revenue numbers. As you can see, growth has come to a screeching halt in the last 6 periods.

Quarter Revenue Growth From Prior Quarter
Q4 2010 $195,759 -
Q1 2011 $242,890 24.1%
Q2 2011 $279,140 14.9%
Q3 2011 $306,829 9.9%
Q4 2011 $311,327 1.5%
Q1 2012 $320,970 3.1%
Q2 2012 (projected) $344,120 7.2%
Q2 2012 (actual) $332,500 3.6%

Zynga reported just half the sequential revenue growth analysts were expecting in Q2.

As anticipated, Zynga came in short on revenue, because of weaker user monetization.

One of the many (and often confusing) metrics that Zynga uses in its quarterly reports, is average daily bookings (APBU). I believe this is the most important figure to Zynga's core business for several reasons. First off, Zynga makes almost all (90%+) of its revenue from bookings. Second, this metric generates its numbers from Zynga's DAU's (daily active users), which happen to be the few (less than 5%) of Zynga's paying gamers.

For this reason, Zynga's business model is extremely vulnerable (it relies on a very select group of paying users). So, if we're going to make average daily bookings a big deal, let's make DAU's one as well.

Now take a quick peek at Table II.

ABPU = Average Daily Bookings Per User

DAU = Daily Active Users

Quarter ABPU ($) Q/Q Growth DAU (M) Q/Q Growth
Q4 2011 .061 - 54
Q1 2012 .055 -9.8% 65 +20.3%
Q2 2012 .046 -16.4% 72 +10.7%

Even though Zynga has had success gaining DAU's in the past 3 quarters, it's been done at Zynga's own expense (literally). Zynga's ABPU is clearly in a period of accelerated decline. Another interesting tidbit of information is that Q2 2012, was the first YOY (year over year) decline in this metric as well.

Zynga is getting worse at monetizing its users, and we are near a tipping point where revenue will begin to sequentially drop.

DAU growth is clearly decelerating, this is probably due to a combination of factors. The biggest being that Zynga's games were simply a fad. And although I'm a big fan of the potential of social gaming, Zynga clearly isn't what consumers are looking for.

Luckily, Zynga's management has put the icing on the cake. Stock based compensation for 2012 is projected to be in the range of $410-$430 million. That means for every dollar Zynga generates in revenue (not profit) this year, about $0.38 will go straight into management's pocket. That's about the only target I'm confident Zynga will achieve in 2012.

Estimates for the back half of the year have now been pushed from $786 million to $546 million. That implies revenue will fall about $59 million or (18%) in both Q3 and Q4.

Finally, as his mark of 'adieu' Pincus sold over $210 million worth of stock in March when shares were trading around $12-$14.


With EPS estimates down to $0.04-$0.09 for 2012 (non-GAAP), Zynga would even seem over priced at $1.40 (20x earnings). Until insiders stop being paid to dilute the stock, and growth starts to ramp up, Zynga has further downside. If the back half of 2012 is as bad as management has projected, things are going to get even uglier for Zynga. This bubble has popped.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.