Zynga - Shares Hit Yet Another Record Low, Valued At Merely Its Cash Balances

| About: Zynga (ZNGA)
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Shares of Zynga (ZNGA), the producer of social games, move yet another leg lower. On Thursday after the close, the company withdrew its full year 2012 outlook, causing shares to fall another 20% to levels around $2.25.

Preliminary Results

Zynga reported its preliminary third quarter results after the close on Thursday. For the quarter, Zynga anticipates revenues of $300-$305 million, with bookings coming in at $250-$255 million.

The company expects to report a GAAP net loss between $90-$105 million, while non-GAAP losses are expected to come in between $2 and $5 million. As such, GAAP losses per share are expected to come in between $0.12 and $0.14 per share.

Zynga will take an estimated impairment charge of $85-$95 million, reflecting weakness of games in the "invest and express" category. The impairment relates to the acquisition of OMGPOP earlier this year, known from its game "Draw Something". Just six months ago, Zynga paid $180 million for OMGPOP, and now it writes down half of the value.

Withdrawn Full Year Outlook

For the full year of 2012, Zynga has withdrawn its outlook. The lower guidance is the result of reduced expectations for web games including The Ville and a delay in the launch of new games.

For the full year of 2012, Zynga anticipates bookings of $1.085-$1.100 billion, compared to an earlier guidance of $1.15-$1.225 billion. Adjusted EBITDA is expected to come in between $147-$162 million, compared to an earlier guidance of $180-$250 million.

CEO and founder Mark Pincus commented on the update, "The third quarter of 2012 continued to be challenging and, while many of our games performed to plan as a whole we did not execute to our satisfaction. We're addressing these near-term challenges by implementing targeted cost reductions in the fourth quarter and rationalizing our product R&D pipeline to reflect our strategic priorities."


Zynga ended its second quarter with roughly $1.6 billion in cash, equivalents and short and long term marketable securities. It operates with roughly $100 million in long term debt for a net cash position of $1.5 billion. Most likely, the cash balances will be largely unchanged in the third quarter, as losses are largely the result of non-cash impairments.

Zynga ended the second quarter with 730 million diluted shares outstanding, up 12 million compared to the first quarter. This values the firm at merely $1.6 billion based on a share price of $2.25 in after hours trading. At this valuation, the market values the firm's operating assets at merely $100 million.

Based on anticipated $1.2 billion in annual revenues the firm's operating assets are valued at merely 0.1 times annual revenues. The company will report a net loss for the full year.

Investment Thesis

Year to date, shares of Zynga have fallen some 75%. Shares started the year at $9 per share and quickly advanced to $15 in March. From that point in time shares kept falling. At the peak of the social game hype, the company acquired OMGPOP, the manufacturing of "Draw Something". Furthermore, the company and its founder sold shares near the peak.

The offerings were followed by a string of profit warnings in subsequent months. The deteriorating results, led to major defections from the company's developers who saw their option packages have fallen towards zero.

By the end of July, shares already fell 40% after the company published dismal second quarter results. Third quarter revenues are expected to fall another 10% to $300-$305 million, compared to second quarter revenues of $332.5 million.

While operational performance is an absolute disaster, and management has severe credibility issues, the company has a rock solid balance sheet with roughly $1.6 billion in cash and equivalents. The market has completely given up on Zynga, valuing the operating assets at just $100 million.

The best way forward is for CEO Mark Pincus to give up control, and hire an experienced outside executive. Furthermore the company has to restructure its business and step away from making expensive acquisitions.

Zynga's valuation is entirely based on speculation, and while the state of the current operations is dismal, the financial position remains rock solid. Speculative investors could buy some shares in anticipation of large changes at the company, but serious investors should stay away.

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.