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I very rarely write about anything but fundamentals and my opinion of them, on any stock. Zynga (ZNGA) offers me a unique opportunity to write about the stock from a consumers point of view. It is unique because the fundamentals are also unique.

Zynga Basic Fundamentals

Zynga : Price: $3.09/share, ESS Rating: NA

  • The market cap is $2.25 billion
  • It sells for only 1.25% of book value based on the 7/27 closing price
  • Revenues of $1.27 billion
  • Gross profits of $810 million
  • Total cash of $1.2 billion
  • Total debt of just about NOTHING ($100 million)

On the surface, these fundamentals actually show a rather "clean" balance sheet. That being said, looks can be deceiving, especially when it comes to an online game site.

That does not mean the stock does not have a pulse, but to be candid, it is a weak one at best in my opinion.

What I See From A Zynga "Addict" Point Of View

I happen to love Zynga games. I play Mafia Wars and Mafia Wars 2 5 times a day. What frustrates me with the games right now is that it does not appear to me, from an addicted consumer's point of view, that Zynga is putting any of their cash to work within the games themselves.

Sort of like being addicted to drugs, we Zynga addicts need more and more to keep our game "high" going. Taking Mafia Wars 2 as an example, it is a relatively newer game with almost 2 million players, and Zynga has not added anymore new "toys" for us to get excited about.

That's when folks stop playing. From all accounts, players are not playing as much and that spells trouble for the stock.

The same issues plague their other games, from what I understand, and quite frankly, what is Zynga selling, if not for these little games?


The Future Of Zynga Stock

Here is their business summary from Yahoo Finance:

"Zynga Inc. develops, markets, and operates online social games as live services on the Internet, social networking sites, and mobile platforms. The company offers its online social games under the CityVille, Zynga Poker, FarmVille, CastleVille, FrontierVille, Mafia Wars, Word with Friends, Hidden Chronicles, Zynga Bingo, Scramble With Friends, Slingo, and Dream Heights names. Its games are available on various platforms, including Facebook (FB) and other social networks, as well as mobile platforms, such as Apple iOS and Google Android worldwide. The company was formerly known as Zynga Game Network Inc. and changed its name to Zynga Inc. in November 2010. Zynga Inc. was founded in 2007 and is headquartered in San Francisco, California."

Ok, so as I said, online social games are Zynga's business. It is not working. Here are some quotes from a recent article that pretty much sums everything up:

"Facebook made changes to its gaming platform that hampered Zynga regulars. A critical new game, "the Ville," was delayed. Another new game, "Mafia Wars II," just was not very good, executives conceded. The heavily hyped "Draw Something," acquired in March, proved more fad than enduring classic. Meanwhile, some old standbys lost some of their appeal."

Seems like this will impact Facebook, as well as Facebook has impacted Zynga (remember Zynga pays Facebook a very significant sum of money (30% of revenues) to use its platform and that has diminished greatly just by looking at the Zynga earnings report), and Facebook has been Zynga's life blood.

"Facebook made a number of changes in the quarter," John Schappert, chief operating officer, said in a conference call with analysts. "These changes favored new games. Our users did not remain as engaged and did not come back as often."

To cite some basics from the earnings report, revenue for the second quarter was $332 million, below analysts' expectations of $343 million. Zynga also lost $22.8 million, or 3 cents a share in the quarter.

It goes further however, per the article:

"But the real problem was that Zynga slashed the forecast for its bookings - revenue less fees it pays Facebook - to as low as $1.15 billion for 2012, from $1.47 billion."

There was also a very contentious conference call in which Richard Greenfield of BTIG slammed Zynga and its chief executive Mark Pincus, for dumping shares at $12.00/share just after the public offering.

"Pincus did not directly respond beyond saying "we believe in the opportunity for social gaming and play to be a mass-market activity, as it is already becoming."

It is NOT unusual for executives to sell shares after a company goes public so I would not read anything more into this observation aside from Pincus' lack of response directly.

To illustrate the Facebook and Zynga bond, the article states accurately:

"Zynga and Facebook are tied at the hip. Until recently, Zynga games could be played only on the Facebook platform, and for every dollar that users spent on buying virtual goods, Facebook pocketed 30 cents, its principal moneymaking channel other than advertising."

I suppose the big question is, as Facebook goes, so goes Zynga?

My Opinion

I would not buy shares of Zynga unless you feel that there might be some sort of buyout in the future. Personally I am not one to play that game but to me it appears that Facebook MIGHT take advantage of the Zynga share price and balance sheet to just gobble it up. Unless Zynga decides to make some bold moves I cannot see any upside from here, even at these levels.

That is pure speculation on my part, but I have seen this sort of situation before, and Facebook has the money.

Does that mean investors should gobble up shares based purely on speculation? Not in my playbook.

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

Source: Zynga: Don't Get Fooled By The Cash And No Debt