Drawing Zynga Higher

Gaming company Zynga (Nasdaq: ZNGA  ) has been criticized for two things -- its excessive dependence on Facebook and its lack of originality. The company has attempted to answer both with an estimated $180 million acquisition of OMGPOP.

Does it change anything? Here are some of my thoughts.

Draw something original
OMGPOP's Draw Something, which was launched merely six weeks back, is an extremely popular game. Downloaded 35 million times in one week alone and landing on top of the "top paid" and "top free" lists in the Apple's app store, this game has created quite a sensation. Keeping that in mind, it's easy to see why the OMGPOP deal is likely to add more users to Zynga's burgeoning customer base.

But the one question that's troubling me is: How long will this game sustain its top position? My guess is not too long. That's when Zynga will inevitably try to use OMGPOP's team of 40 people to create fresher, more innovative games, something it hasn't been able to do for a long time now.

Although Draw Something (essentially an online variation of Pictionary) is not very original, I think the OMGPOP team has immense potential and should be able to bring in more original games for Zynga.

Unhooking from Facebook
Another huge positive with Draw Something is that it does not use Facebook Credit as its virtual currency. That means that while the game is extremely popular on Facebook, the company does not need to pay the social-networking giant a cut. With a stand-alone app, Facebook earns nothing but Zynga continues to have access to the former's huge user base.

Stretching it a bit, the combination of Zynga's new platform, Zynga.com, and the not-chained-to-Facebook-apps factor could well be the formula for success the company has been seeking lately. Zynga can now look to grow rapidly through acquisitions, which has, in fact, been the general trend in the industry for the last couple of years. Last year, Electronics Arts (Nasdaq: EA  ) paid $1.3 billion to acquire the maker of the popular game Plants vs. Zombies. In 2010, Zynga itself acquired Newtoy, the maker of Words With Friends.

Things are changing...
...and for the better. While it's anybody's guess as to how things will finally pan out, I am turning bullish on this company. My caveats for now are: (1) OMGPOP has created just one hit game during the past six years. (2) In 2010 and 2011, Zynga made as many as 22 deals worth $105.1 million, and most did not add significant value. Fools, remain watchful.

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Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 12, 2012, at 2:48 PM, getrealmd wrote:

    I'd have thought the valuation and massive insider sells would have been a consideration. Any thoughts there?

  • Report this Comment On April 12, 2012, at 4:33 PM, MichalTod wrote:

    Diversifying out of Facebook is great. However, Zynga still has to pay a 30% cut of Draw Something's sales... to Apple. On Android... there's a 30% cut to Google or Amazon. Diversifying away from Facebook is a good thing because Zynga will be less dependent on one outside company, and Facebook will have to respond to the competitive threats to its platform. But Zynga will still have to pay someone that 30%.

  • Report this Comment On April 13, 2012, at 9:52 AM, AcapulcoKevin wrote:

    Games are entertaining for a while, then we get bored. Websites are entertaining and then we get bored.

    Creating flash based games is extremely easy and most intelligent 12 year old kids could make the games.

    So while Zynga convinces the world it is genius for creating games a child could write, the real genius is how they are able to convince stupid people that they are a good investment.

    People - you are being ripped off by Zynga. Their goal is to get you to buy virtual garbage and less than 3% of the user base is willing to throw away real world on a virtual garden rake.

    So, what does the company do? They help you lose the game to inspire you to buy that virtual garden rake.

    I strongly believe the company is defrauding users and targeting users who have in the past made a payment.

    There is no oversight into the programing or databases that comprise the games therefore companies like Zynga are able to rip people off with little or no possibility of being caught.

    In your face theft. Is that what trading has become in the USA? Plus, buying stock in Zynga is just like buying the "Virtual Rake" it has no real value, it is not a real product.

    On another note: Facebook stock. What a tragic waste of money. A couple of years ago everyone was using Myspace. The Myspace site was always buzzing with activity. Today, go and look at the last time your Myspace friends used the site and you will be amazed at how many of your friends have not used the site since 2009.

    Facebook will eventually go down the same road as Myspace. Another site will come along, get some media buzz, become popular and we will all follow our friends to the other site.

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