Zynga Is Locked and Loaded -- but It Shouldn't Be

I did it. I gave in. I went and bought a copy of OMGPOP's popular Pictionary knockoff Draw Something. I could have downloaded the free ad-supported version, but I was in a feisty mood so splurged with the $0.99 pay version (you get 2,000 extra words!).

The scene of the crime
My wife and I were at a friend's house, and the Draw Something bug had clearly bitten every single one of our amigos, and considering its social elements it quickly spread to us like a contagion. This was weeks ago, and the game provided me well over a buck's worth of entertainment. Except now ... I'm getting bored with it.

It's a fun little game, but ultimately can it really withstand the test of time, as our collective attention spans continuously shrink, for better or worse. How long can the game really bump elbows with the likes of Angry Birds and its fowl offspring?

I have to wonder whether Draw Something will be little more than a passing fad, as it begins to fade from my own consciousness. That's a key question that Zynga (Nasdaq: ZNGA  ) needs to be asking itself right now, especially since $200 million is quite a price tag for to buy a developer that's mainly proved to be little more than a one-hit wonder so far. (Zynga tried to buy Rovio, too, by the way.)

I'd wager that few people out there could even name OMGPOP's other mobile titles (Hint: There are two others). Given up? That's because Puppy World and Boom Friends aren't particularly exciting, interesting, or innovative -- not that Draw Something is reinventing any wheels any time soon.

A baby elephant gun
Zynga has effectively paid $200 million for a single title and the small team of OMGPOP's developers (excluding this one). The top spots in Apple's (Nasdaq: AAPL  ) iOS App Store are definitely valuable, but Zynga won't be able to afford every title that climbs its way up, despite how badly it wants to expand into the mobile-gaming front with platforms like iOS.

Apparently, Zynga thinks it can be done, as CEO Mark Pincus and merger exec Barry Cottle recently told Bloomberg that it's still on the hunt for more acquisitions, and the $1.8 billion in cash and investments on the books are ready and waiting to be deployed to such ends.

The social gamer has picked up 22 separate companies over the past two years, and Pincus is looking to do several more acquisitions that are about the size of the OMGPOP deal in the coming years. Remember when I called Zynga's current acquisition strategy unsustainable "in terms of both dollars and integration," because of its dubious corporate ethics and cutthroat internal culture? At least six of the startups that Zynga has acquired have seen their founders jump ship.

Zynga was able to poach Cottle from gaming giant Electronic Arts (Nasdaq: EA  ) with a juicy pay package. The gaming stalwart had outbid Zynga for PopCap Games last year, maker of Plants Vs. Zombies and Bejeweled.

Draw Something is estimated to be bringing in $250,000 per day in revenue. That means it would take 800 days, or more than two years, to break even with the acquisition price on sales. Keep in mind that's revenue, not profit. That also assumes that OMGPOP's other games aren't contributing too much (a mostly fair assumption), and that Draw Something can keep its top spot and maintain its revenue-generation rate for such an extended period of time -- not likely on a platform as competitive as iOS.

A rhetorical question
Zynga is effectively extending a standing offer to acquire any developer that makes it up the charts, either by luck or by skill, which is not sustainable. That brings up the age-old question: Would you rather be lucky or good? Don't bother answering that, because Zynga will still acquire you regardless.

At the end of last year, before the OMGPOP acquisition, the company had about $123.9 million in goodwill and intangibles on its balance sheet -- less than 5% of total assets. As it continues its acquisitive streak and grows its goodwill and intangibles, it also increases the risk of eating impairments down the road if some of these acquisitions prove not to be worth the hefty prices. This is particularly true as it pursues acquisitions of dubious value, like the OMGPOP deal.

Sorry, Zynga, but you overpaid for Draw Something. It would have been cheaper to just copy it.

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Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't 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.


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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 17, 2012, at 10:32 PM, jacobandersen72 wrote:

    zynga is buying revenue.

    they are doing this to keep the stock price up for long enough that pincus can sell shares.

    he is selling a ton to the public shortly.

  • Report this Comment On April 18, 2012, at 2:30 AM, mattysmitty wrote:

    Draw something will stick around for a long time, not to mention can be improved and ported to other devices such as android, mac, pc (anything with a screen).

    The game needs new words and new rules, it got boring because no skill was needed and people started cheating. Give time limits, high scores, the ability to save all draw something pictures, cross platform support and promotional words and I think this app will last long in to the future.

    Imagine Green Day could pay to have their band listed as a word and drawn about... people are more likely to go listen to a Green Day song (Green Day getting the free attention as we speak, I drew it 3+ times).

    Angry birds has essentially released the same thing over and over again and has gotten away with charging for it over and over... not to mention all other revenue angry birds brings in.

  • Report this Comment On April 18, 2012, at 10:22 AM, AcapulcoKevin wrote:

    I would have lost a pile of money had I invested in this company. I am certain there are many people wishing they never heard of the company or bought stock just because they have played one of the games.

    I want to see Federal regulation and oversight happening with companies like Zynga. The potential to cheat players is too great and the profit they are earning is very suspicious to me.

    Fraudulent behavior on the part of online casinos has been documented. The most commonly reported behaviors are refusal to pay withdrawals or cheating software with rigged payouts.

    Some casino software has been mathematically proven to cheat, such as Elka System/Oyster Gaming and Casino Bar.Screen shots from the back office of an older brand of software indicated the odds could be adjusted by the operator.

    Zynga creates their own games and is obviously in full control of the odds of winning. Without oversight there is no one to stop them from cheating their clients. Simply targeting people who have made purchaces in the past would be sufficient to stuff Zynga's bank account.

    I thought of this when I saw their biggest insiders dumping stock several days ago. They knew it would have a negative impact on the stock price but still dumped as quickly as possible.

  • Report this Comment On April 18, 2012, at 10:24 AM, AcapulcoKevin wrote:

    I would have lost a pile of money had I invested in this company. I am certain there are many people wishing they never heard of the company or bought stock just because they have played one of the games.

    I want to see Federal regulation and oversight happening with companies like Zynga. The potential to cheat players is too great and the profit they are earning is very suspicious to me.

    Fraudulent behavior on the part of online casinos has been documented. The most commonly reported behaviors are refusal to pay withdrawals or cheating software with rigged payouts.

    Some casino software has been mathematically proven to cheat, such as Elka System/Oyster Gaming and Casino Bar.Screen shots from the back office of an older brand of software indicated the odds could be adjusted by the operator.

    Zynga creates their own games and is obviously in full control of the odds of winning. Without oversight there is no one to stop them from cheating their clients. Simply targeting people who have made purchaces in the past would be sufficient to stuff Zynga's bank account.

    I thought of this when I saw their biggest insiders dumping stock several days ago. They knew it would have a negative impact on the stock price but still dumped as quickly as possible.

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