Zynga Beats Earnings With Friends

The social-gaming giant keeps getting bigger: Zynga (Nasdaq: ZNGA  ) is serving up better-than-expected first-quarter results. Revenue climbed 32% to $321 million, and adjusted earnings reversed a year-ago deficit to clock in at $0.06 a share. Analysts were forecasting a profit of $0.05 a share on $317.3 million in revenue.

Zynga remains the undisputed champ of the social-gaming universe. It watched over eight of the 10 most popular games on Facebook as of the end of last month, based on daily active users.

It was easy to see a strong quarter coming when Facebook filed its quarterly results through an SEC filing earlier this week. The report revealed that Zynga accounted for 15% of Facebook's revenue through the first three months of the year.

This quarter alone found Zynga hitting it out with Boggle clone Scramble With Friends, hidden-object casual game Hidden Chronicles, and the long overdue revival of early dot-com classic Slingo. Zynga also picked up the wildly popular Pictionary board-game knockoff Draw Something when it acquired OMGPOP in an estimated $200 million deal back in March.

There's no denying that social gaming is huge. It's coming at the expense of traditional gaming companies as Activision Blizzard (Nasdaq: ATVI  ) has seen World of Warcraft players decline for a little more than a year. Electronic Arts (Nasdaq: EA  ) seems to get it. It has made a few acquisitions of casual-gaming companies, and The Sims Social is one of Facebook's hottest games, with 16.5 million unique monthly players.

Despite being an obvious play on next month's Facebook IPO, investors are still leery of Zynga. The shares are trading below the company's December IPO price of $10. At first glance this comes off as a big surprise. Zynga was accounting for only 12% of Facebook's revenue when the social-networking giant filed last year's financials, so the bump to 15% suggests that Zynga as a coattail play may be even smarter than Facebook itself.

However, the challenge for Zynga to remain relevant will continue. It had to acquire the developers behind Words With Friends and Draw Something, and it will have to keep buying the hot app makers in this fickle niche.

Daily active users have only grown from 62 million a year ago to 65 million today, though monthly active users are climbing at a healthier 24% pace.

Zynga's crime -- the reason it's imprisoned as a busted IPO -- is that it simply came to market at an outlandish valuation. Underwriters may have jumped the gun in tagging this company with a $7 billion valuation in a booming yet fickle industry.

Zynga's now looking at $1.425 billion to $1.5 billion in bookings this year, and its adjusted profit range of $0.23 to $0.29 a share is in line with the $0.27 the pros were targeting before the report. It's not a bad performance, but when the market says you're worth more than EA and roughly half as much as Activision Blizzard, it's hard to live up to the hype.

Gnaw something
Even though the next trillion-dollar revolution will be in mobile, it may not involve Zynga. A free special report will get you up to speed.

The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position in Activision Blizzard. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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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 28, 2012, at 12:40 PM, thesmartestfool wrote:

    "Electronic Arts (Nasdaq: EA ) seems to get it. It has made a few acquisitions of casual-gaming companies, and The Sims Social is one of Facebook's hottest games, with 16.5 million unique monthly players."

    The quote from your article, which I've reproduce in my comment above is indicative of the markets failure to understand the video game market.

    Social online "free" game companies like Zynga and GLUU mobile target a very different segment of the market than companies like ATVI and EA. The average 17 year old high school male is not going to be cancelling his subscription to WoW or CoD Elite to play "Words with Friends". Conversely, the soccer mom who plays "Words with Friends" will probably never pick up a PS III controller or login to a computer to try WoW or CoD MW3. There may be certain segments of the population where there is crossover, but overall comparisons between social online free game companies and more traditional video game development studios are like comparing apples and oranges.

    The difference is similar to the difference between radio, TV (i.e. small screen), and Movies (i.e. big screen). Social free mobile games are like radio. Most folks are not going to pay significant amounts of money for radio, but the model works because of ad revenue, and the average person's need for content (e.g. music, talk radio, etc.) in certain situations (e.g. driving, working out, etc.)

    Companies like ATVI and EA are better compared to movie studios. Large segments of the population will pay significant dollars ($50+) for a game that is well done and that could provide hours, days, or months of entertainment.

    Your article reinforces the misinformed notion that companies like ATVI should be entering into the "social gaming space" in order to stay viable or to stay profitable.

    While there are certain economies of scale to be gained by doing so, the two sets of core businesses are very different. Imagine if someone stuck an ad in your movie? It would detract from the experience. Imagine if someone charged you to listen to radio? Only a very small segment of the market has taken to satellite radio.

    While companies like ATVI and EA should consider entering into the mobile/freemium gaming space when it makes sense for their business models (e.g. using the mobile/freemium models as gateways to their core products), investors should be wary of companies that jump into this space because the "market" thinks it makes good business sense.

    EA's earnings report and inability to turn a profit reinforce my comment above.

  • Report this Comment On May 05, 2012, at 10:05 AM, thesmartestfool wrote:

    Rick,

    Here is the article that you referenced in a response back to me on a comment I left on a different article.

    I think it would be helpful for readers to be able to make up their own minds about whether the "rise" of Social Game companies like Zynga is coming at the expense of game companies like ATVI.

    http://www.mckinsey.com/Search.aspx?q=white%20paper%20social...

    After reading the white paper, I came away with the opinion that social game companies may alter the way "traditional" game companies do business.

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