Zynga's Forecast Suggests Further Weakness Ahead

| About: Zynga (ZNGA)

Social gaming platform creator Zynga (NASDAQ:ZNGA) updated its 2012 forecast based on recent performance. The company announced revenue will be $300 million to $305 million, but bookings will total just $250 million to $275 million. Zynga also slashed its full-year bookings guidance to $1.085 billion to $1.1 billion, from its previous guidance of $1.15 billion to $1.225 billion. EBITDA guidance was slashed to $147 million to $162 million, meaningfully short of its previous guidance $180 million to $250 million.

According to CEO Mark Pinkus, the third quarter was fairly challenging, and the company will have to focus on building a robust game pipeline. It seems that with fierce competition from mobile gaming, the firm's games on Facebook (NASDAQ:FB) are losing some luster. Additionally, mobile games can literally pop up overnight, so the gaming lifecycle is becoming shorter and shorter. We figure the mobile market is significantly more difficult than Zynga imagined, as the company is writing down most of its acquisition of OMGPOP-an acquisition that will prove to be a complete waste of shareholder's capital.

Since Facebook receives roughly 16% of its revenue from payments from Zynga in its second quarter, the social networking firm will have to see strong advertising revenue growth to compensate for the gaming weakness. Clearly, the shift to mobile computing is hitting Facebook on all fronts-not just in the advertising revenue department. We had warned investors of Facebook's impending stock market decline here.

Ultimately, we're not fans of either company at current levels, but we'd particularly shy away from Zynga. In our view, the social gaming space is much more competitive and requires less investment than console gaming, so the next FarmVille can come out of a basement in North Dakota, and it doesn't need to be incubated in Silicon Valley. The future for social gaming remains strong (gaming itself is a social experience), but Zynga's future remains dependent on making another hit-not the easiest thing to do in the space. The firm scores a 5 on the Valuentum Buying Index (our stock-selection methodology), so we won't be adding the name to the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.