Why Zynga's New Games Won't Help Solve Its Problems Or Reward Its Investors

| About: Zynga (ZNGA)
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Social game-maker Zynga, Inc. (ZNGA) has faced more than its share of issue since going public last December. The stock peaked at over $14 in March but has fallen precipitously since then. The latest news out of Zynga is the recent release of Farmville 2, the follow-up to its Facebook (FB)-based, mind-numbing cow clicking game. While some believe a new Farmville is just what the doctor ordered to fix Zynga's troubles, I highly doubt it will make much of a difference. Stay far, far away from Zynga; it's just rearranging deck chairs on the Titanic.

First of all, as someone that has grown up in the midst of the technology boom, I have a feeling that what happened with Zynga is a bit similar to what happened with Facebook. Investors/businessmen saw how popular it was becoming with people and jumped to the conclusion that popularity was equivalent with financial gain. In the case of Facebook, given that it is such a relatively new technology and people are just getting used to the mere concept of social networking, investors didn't really have all of the requisite information to make an informed choice about whether or not to invest. It's really much the same with Zynga, though I find the putting of Zynga on a pedestal to be far less forgivable, as it really was just a company that made Facebook games that sent annoying notifications to users. For those not familiar, Farmville gained popularity on Facebook as a time-wasting game in which users earned points by clicking on crops and farm animals, points that could be used to improve their farm. Oh yeah, and you can skip all of the actual clicking (playing?) by just buying better farm stuff. Farmville has been panned by game critics and has the distinction of being one of Time Magazine's worst inventions of all time. Time will soon tell if Farmville 2 can garner the popularity of the first game, but my opinion is that the ship has sailed and gamers will not be taking to this one in droves. That will only go to hurt the rest of Zynga's 2012 numbers, as the company now has placed much hope in the second coming of Farmville.

Though Zynga has other games, they're all basically the same thing as Farmville (CastleVille, CityVille etc.). One bright spot has been the popular Words With Friends, which is a Scrabble-like social word game. However, the company has struggled to monetize their games, as originally they were free games played on Facebook. To date, no Zynga game has had the success of FarmVille (which accounted for an absurd 29% of Q1 Revenue in 2012, despite the game debuting in 2009), and the company's finances are in dire straits. That's what happens when your most popular game continues to carry your company, and not because it was such a great game but because nothing has come along to take its place. Thus, the release of a new FarmVille game seems kind of like a washed up rock musician re-releasing their popular decade-old album, instead of a company banking on a hot new and unique act.

One could say that Zynga has tried to do so and failed (and is, thus, resorting to a new Farmville) but Zynga's innovation is weaker than it appears if it has really put a firm foot forward on original new games. Words With Friends, a reinvention of already existing word games, was undoubtedly one of the more popular app-games available, but it wasn't enough to keep Zynga in the black. And because it wasn't a strong enough concept, it started getting clobbered by other newer games. (including "Draw Something", an uberly-popular game made by OMGPop, which was then bought by Zynga, only to find its gaming download numbers heading downward, too). In short, the profit hasn't been sustainable - and this will prove to be Zynga's problem for the long haul. Games fade. Others come and the lifespan is too short for a company like Zynga to remain a "buy" even if it's created two of the more popular games ever and bought the company that made a third.

And now, it's looking like Zynga executives are scrambling as fast as they can to leave the company. In addition, Zynga is currently being sued by Electronic Arts (EA), which claims that one of Zynga's games (The Ville) is an "unmistakable copy" of one of EA's games (The Sims Social). While early reviews of FarmVille 2 have been positive, it remains to be seen how much actual profit will be generated by Zynga, as they rely on a business model that is questionable at best. For one thing, though it has been trying to distinguish itself, Zynga's fate so far has been tied to Facebook's, which is not good (see a cavalcade of financial articles about Facebook written since its IPO). And, as I've stated, Zynga has been unable to keep sustaining download numbers from its games, and has instead found next generation games eating into its numbers. While analysts at first felt Zynga's business model could be sustainable, those numbers have dwindled, and Zynga is met with near-unanimous skepticism about its future viability.

Zygna is down over 70% this year, though that's probably due to a wrongful valuation of the company rather than its inability to actually bring in revenue. Though its game innovation leaves some thing to be desired. Now, its Marketing Chief is exiting the company, probably due to frustrations brought on by Zynga's model. That marketing chief, Jeff Karp, came to Zynga from E.A., a company that's been able to make solid revenue off of games. The E.A. lawsuit might be the real reason that Karp is leaving, as he was named specifically in it, but I see it as just another sign that Zynga doesn't know what it's doing.

While the release of FarmVille 2 may be good for Zynga in the short-term, that does not mean it's time to invest in Zynga. It was never time to invest in Zynga, and it doesn't look like it ever will be. For one thing, I think investors would be wise to pay attention to the actual quality of the games companies produce, not just the amount of buzz they receive. The solution to long-term viability for Zynga could be producing innovative, quality games/apps. So far, I've seen nothing to suggest that Zynga is an innovative gaming company, just one that provides a time-wasting activity for people while they're waiting for their friends to come on Facebook Messenger. FarmVille 2 could result in a temporary minor gain in Zynga's stock price, but I highly doubt it will be sustained, and Zynga ought to be avoided at all costs.

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

Business relationship disclosure: This article was written for Freedonia Freelance by one of our analysts.