Zynga Bulls Need To Look At The Facts

| About: Zynga (ZNGA)

I have already discussed Zynga (NASDAQ:ZNGA) but a recent article reflects that some bulls are incapable of bringing facts to bear.

The latest horrendous earnings report may have demonstrated that Zynga can never be consistently profitable by producing fad games.

They have demonstrated that fact. Had they actually figured out the secret sauce behind social games, we'd see some more organic hits from Zynga instead of the OMGPOP acquisition.

The only game that has consistently attracted and retained users is Zynga Poker, and I believe that this and perhaps other real money gambling games will be the company's future salvation.

In light of Facebook's recent foray into online gambling, it's not hard to imagine that Facebook's (NASDAQ:FB) solution would completely swamp Zynga's solution (especially in light of anemic uptake of Zynga's game-centered non-Facebook networks like Project Z).

I am still surprised by how little credence investors (and especially short sellers) give to even the slightest possibility that Zynga will be able to make this happen, acting as if bankruptcy is a foregone conclusion at this point.

The last few months demonstrated Zynga's desperation to find a new hit at all costs, be it by a overvalued acquisition of OMGPOP or by ripping off Electronic Arts (NASDAQ:EA) games.

Unfortunately for this argument, there's still the dirty little secret that Zynga now has $1.6B in cash, $1.90/share even considering the fully diluted share count of 845M expected by the end of the year.

Capital IQ claims the number is closer to $1.22B ($1.60 per share undiluted, $1.40 fully diluted).

Contrary to short sellers' rumors, Zynga is not going to use this cash as kindling to burn down its newly completed $275M corporate headquarters for the insurance money.

No one suggested this. It has been said that the cash on the balance sheet is a retrospective measure and doesn't reflect future performance.

Consider that Pokerstars will shell out $225M to buy Full Tilt Poker, even though the latter had been ravaged by a Ponzi scheme that left a $730M shortfall in its customer accounts that Pokerstars will have to cover as part of the deal. Full Tilt's CEO, Ray Bitar, was actually arrested and charged with fraud by the U.S. attorney's office in New York.

If you bothered to read the settlement you'd understand the actual nature of the acquisition (which was not pretty).

If Full Tilt is worth $225M just for its mistreated and potentially now disloyal players and tainted brand name, then surely the Zynga Poker franchise is worth something, even though the market is currently giving no value to it or any other game in Zynga's lineup.

Again, if you read the settlement, it's clear that the acquisition was part of a larger settlement to free up PokerStars from future claims. In fact, it reflects poorly on Zynga's asset, as the real value is far less.

Instead, most analysts and their flock are currently assigning zero worth to any of Zynga's current or future games, which still attract players in numbers that would make other game companies envious.

Zynga as a brand has little value, as explained by many people. They don't have the same branding as, say, Activision Blizzard (NASDAQ:ATVI). The case of Draw Something should show that a hit could come from anywhere and gain traction really quickly.

While Zynga Poker currently is prohibited from running real money games, it still generated $50M in revenues last quarter, and the sheer number of players it attracts would make the franchise extremely valuable if online poker were legalized, because of the network effect.


More players means that's where others will go to try to take advantage of their perceived edge in skill. To paraphrase the cult classic poker movie "Rounders" -- if you can't spot the sucker at a table of 35 million players, then you probably are the sucker.

Network effect isn't really relevant in real-money poker. There's a big assumption that people would switch to real-money games, but given that most Zynga users don't pay in the first place there's little reason to believe most users would switch over. Actually, it would seem that Zynga has attracted a group of casual gamers who would not be likely to commit any sort of serious money to the games. That "table" most likely will have less than a million users paying up, and by today's internet standards a new system can catch up very quickly (Draw Something blew past the 1M user line in the first few weeks).

I urge you to look into making a calculated bet on Zynga shares at a time when they are so hated by the market that you can get a free roll on the potentially lucrative future of the company as a disruptive force in the burgeoning online gambling market.

Calculated bet means that you understand the risks and rewards. No bull has given a compelling argument that they will be positioned to take advantage of a potential loosening of the internet gaming acts. As others have stated earlier, Las Vegas Sands (NYSE:LVS) and MGM Resorts (NYSE:MGM) are far better positioned to influence the new legislation and slant it in favor of brick and mortar casinos.

I urge people to understand exactly what they are getting into before making a bet. The market is not pricing in a glorious success, and with good reason. Hope and prayer do not make a good trading strategy. When you take a moment to understand the underlying bet, Zynga is still overpriced.

Disclosure: I am short ZNGA.

Additional disclosure: I am short ZNGA stock and have written ZNGA call options

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