There Are Still Positives For Zynga

| About: Zynga (ZNGA)
This article is now exclusive for PRO subscribers.

Zynga Inc (NASDAQ:ZNGA) has altered the internet entertainment industry over the past decade through some innovative and engaging games. Playing Zynga games has become a part of the daily routine for a lot of people. The company was attracting massive crowds towards its games on Facebook (NASDAQ:FB) not long ago. However, more recently, Zynga has lost a large number of its customers. On the other hand, Facebook is still able to attract huge number of users every day. As a result, the stock of the company has taken a big hit and currently it trades substantially lower than the IPO value.

Zynga, like Facebook and Groupon (NASDAQ:GRPN), was not able to keep its valuation after the IPO. Slowing growth in revenue and a switch from customers to mobile applications have played a vital role in the fall of Zynga. However, 2013 has been a fruitful year for Zynga investors and the stock has gained over 45% since the start of the year. There is a shift in strategy at the company, which may help this gaming giant get back to previous heights.

Shrinking the Size will Help

One of the reasons for the downfall was that Zynga grew too big too fast. As a result, cost went up substantially. Now that the growth has slowed and revenues have come down, cutting down the costs is a logical decision. Zynga was adding numerous titles to its strong portfolio of games, which fueled the rapid growth of the company. However, a lot of these titles were not able to retain their users. Some of the most popular titles are Mafia Wars, FarmVille, ChefVille, CityVille, CastleVille and Zynga Poker. The company has been trying to bring its house in order since last year. Recently, Zynga announced that it will be cutting 30 employees and closing down offices in New York, Texas and Baltimore. Investors have shown a positive reaction to these actions and the stock price has jumped up.

R&D, sales and marketing and general and admin expenses are three major costs for the company. During 2012, these costs came down substantially. Notably, there was a big decrease in R&D and general and admin expenses. Recent job cuts and office closures will bring these costs further down and enhance the operating margin of the company. Positive results of cost-cutting measures are already clear as the company reported better than expected fourth-quarter results. Zynga reported 12% increase in revenues while bookings stood at $1.15 billion, more than the expected amount of $1.1 billion. Furthermore, Adjusted EBITDA was way above the guideline numbers. Zynga expected EBITDA to remain below $162 million while the company reported adjusted EBITDA of $213 million.

Forays in the Mobile Market, a Reason to be Optimistic?

Smartphones and tablets have changed our lives and PCs are now becoming a thing of the past. For any tech company, it is important to have some presence in the mobile market. Particularly, for an online gaming company it is imperative to have games for mobile devices. Zynga has realized the potential and the company is now offering games for mobile devices. Recently, the company launched a word game called "What's the Phrase" for Apple (NASDAQ:AAPL) iPhones. This is the first app developed by OMGPop Inc for Zynga, and the game is currently available on the Apple app store.

However, the game will soon be ready for Google's (NASDAQ:GOOG) Android users as well. Sale of virtual items is the largest portion of Zynga revenues, and the company will have to capture this vast mobile market to increase these revenues. I am confident that the company will be able to gain a considerable share in the mobile gaming market. Zynga has a strong brand in online gaming, which can play a favorable role for the company.


Zynga has been through a lot of ups and downs. These ups and downs are a part of a rapidly changing tech market. There was another positive for Zynga, after Nevada and New Jersey allowed online gambling. Zynga stock went up after the news hit the market. There are positives for the company and it looks like Zynga is getting some success in getting its house in order. However, there are also some risks involved, such as intense competition and constantly changing environment of online gaming. Nonetheless, I believe the company has enough experience and expertise to get a foothold in the mobile market. I remain cautiously optimistic about Zynga, and believe it may be able to reward its investors in the near future.

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.