Don't Buy Zynga Until It Focuses On Mobile And Handheld Games

| About: Zynga (ZNGA)

Zynga (NASDAQ:ZNGA) reported its 3rd quarter earnings yesterday. The market was expecting EPS of $-0.01 with revenues of $256 million. According to company disclosures, revenue for the quarter was $317 million and EPS were $-0.07. The stock is up 12% on earnings. The company missed expectations last month (while giving an update) by a huge margin of approximately 80%. We believe the company will continue to bleed cash, and its business model is facing tough competition from mobile apps. Therefore, we are giving a sell rating on ZNGA.

Earnings History

11-Dec

12-Mar

12-Jun

EPS Est

0.03

0.05

0.06

EPS Actual

0.05

0.06

0.01

Difference

0.02

0.01

-0.05

Surprise %

66.70%

20.00%

-83.30%

Click to enlarge

Source: Yahoo Finance

According to company disclosures, revenue during the quarter saw a 3% increase (YoY). There was a sharp decline of approximately 11% YoY in bookings, which were down to $256 in this quarter. Net loss for the quarter was $52 million as compared to a net income of $12 million during same period last year. The company broke even in 3Q2011 as compared to $-0.07 this quarter. Bookings were down 12% as compared to the last quarter, at $255 million ($287 million in 3Q2011). In other significant updates, the company announced a share buyback of $200 million (12% of market cap).

On the business front, things seem much better for the company. The DAU (Daily Active Users) increased from 54 million to 60 million, showing a 10% increase YoY. There was a significant increase in MAUs (Monthly Active Users); an increase of 37% YoY. Monthly Unique Users increased 17% YoY, increasing from 152 million to 177 million. The decrease in Monthly Unique Payers was the biggest alarm from the earnings release. MUPs decreased to 3 million from 4.1 million in the previous quarter; meaning a 28% decline. The company still holds the top five games on Facebook (NASDAQ:FB), as reported by the company report. According to company disclosures, the reduced growth of Draw Something was the primary reason behind the MUP decline. The company launched the following four games in the current quarter:

  • FarmVille 2
  • ChefVille
  • Gems with Friends
  • Montopia

2012 Outlook

The company has also given guidance for the year. Zynga expects revenues in the range of $1.09 billion-to-$1.1 billion, below the sell side expectations of $1.5bn. EBITDA is projected to be in the range of $152 million-to-$162 million. According to company disclosures, non-GAAP EPS for 2012 will be in the range of $0.02-to-$0.03.

Conclusion

We think Zynga is relying too much on PC gaming, at a time when gaming is shifting to handheld devices. The company will have to focus more on mobile and handheld devices going forward, in order to create shareholder value. We are bearish on Zynga's future growth prospects and its business model. However, considering its asset value of $2.23 per share (Barclays Capital), the stock is approximately correctly priced. Due to a lack of future growth and earnings miss, ZNGA is not recommended as a buy at these levels.

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

Business relationship disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.