Zynga (NASDAQ: ZNGA) is the developer and marketer of online social games including Poker,FarmVille, CityVille, Bubble Safari, Draw Something andWords With Friends. Most of its games are featured in social networking sites like Facebook (NASDAQ: FB) and mobile platforms like Apple iOS and Android. The company operates in America (60 percent of revenue), Europe and Asia (40 percent of revenue).
On June 13, 2014, Zynga made a regulatory filing announcing the exit of two of its directors from the company's board. The exit of Reid Hoffman and Jeffrey Katzenberg meant that Zynga no longer met The Nasdaq's criteria of a minimum number of independent directors in the board. Zynga has until July 27 to file its plan of action regarding this issue to The Nasdaq, failing which the stock could be delisted.
The present situation, closely following on the heels of the exit of three senior executives earlier this month, reflects the tough decisions taken by new CEO Don Mattrick to turn around the struggling business. Zynga should be able to find replacements for the departing directors before the outlined date, because despite all its woes, the company remains stable.
Zynga's revenue stream comes from ads and in-game virtual product sales. It also earns a commission from affiliates and partners. Zynga showed immense potential in the beginning by reaching $1 billion in revenue within four years of its inception.
In 2012, Zynga's revenues and new user bookings failed to meet projected estimates causing shares to tank 40 percent in April 2012. This marked the beginning of its downfall.
The results for Q1 2014 came out slightly positive for Zynga with a 4 percent increase in users and 8 percent increase in EBITDA. Nonetheless, much of this gain could be attributed to the massive plunge in performance witnessed in 2013.
The revenue posted in 2013 at $0.88 billion was 36 percent down (compared to $1.2 billion in 2012) due to a decline in the number of users from 300 million in 2012 to 150 million in 2013, showing waning interest among users.
Zynga's Monetization methods have been under scrutiny among many analysts. Virtual product sales and in-game revenue, which constitutes 90 percent of revenue stream, seem particularly non-feasible in the long-term and the company must increase its ad revenue stream.
Zynga had shown steps of moving from virtual money to real money gaming in Online Poker, but the success of the platform is yet to be tested. Additionally, it will be entering another business segment with dominant rivals from the online gaming industry.
The share price of Zynga never quite recovered after the fall from in mid-2012. The 52-week trading range has been $2.50 to $5.89.
Although Don Mattrick has made some tough decisions to turn around the management, and the Q1 results have been better than estimates, the long-term potential of Zynga is still iffy. Traditional game makers like Electronic Arts (NASDAQ: EA) and Activision Blizzard (NASDAQ: ATVI) have rebounded with better 2015 earnings guidance. Therefore, investors in gaming stocks could be tempted to choose these stocks over the future growth potential of Zynga, despite its seemingly cheap valuation.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.