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Newly born on the Nasdaq, Zynga (Nasdaq: ZNGA ) sure has attracted a lot of attention. Having a good share of lovers and haters, this stock has recently seen a lot of volatility. So the question remains: Buy or burn?
Buy a virtual cow? No, thanks.
Zynga operates free games such as FarmVille and Zynga Poker on Facebook but charges its users for any purchase of virtual products, such as farm animals and poker chips. These online sales are the core contributor to the company's revenue. Hence, it is important to look at the number of Zynga's users who buy such things.
In the fourth quarter, Zynga's monthly unique users increased by 38% over the third quarter. But its monthly payers didn't match up, increasing by a not-so-tall 13%. This translates into 153 million users and 2.9 million payers. So now more people are playing Zynga's games, but the percentage of buyers has dropped to 1.9% from 2.3%.
This raises concerns about the company's potential to sell its products. Zynga needs to find ways to get existing users to spend more money on its games.
Burn it? Not yet.
But all is not bad. What could possibly be a growth driver for Facebook-dependent Zynga is increased exposure to the booming gaming market on mobile devices. This seems to be something the company understands well, considering eight out of 12 games introduced in 2011 were mobile-based. People playing Zynga's games on mobile phones increased fivefold to 15 million, which definitely raises hopes. Mobile games such as Words With Friends, Zynga Poker, and Dream Zoo were among the highest moneymakers on Apple's iOS platform.
While mobile gaming will add much value, increasing revenue from advertising is another bright spot. In the last quarter, Zynga's advertising revenue contribution to total revenue grew to nearly 9% from 4% in the year-ago quarter. With an increase in users, I think this source of revenue will further expand.
Not that the competition will make it easy. While Electronic Arts (NYSE: EA ) -- maker of popular games such as The Sims Social -- is losing in the online space, it has a much larger presence in mobile games with the likes of Madden NFL 12 and Battlefield 3.
On one hand, Zynga has immense scope to grow in the mobile market and further ramp up its advertising revenue, but on the other hand, I am concerned about its capabilities to perform well in the core online gaming business. While I am still a believer in the company, I would rather watch the farm from a distance a little longer before planting my seeds.
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