How Low Can Zynga Go?

Shares of Zynga (Nasdaq: ZNGA  ) hit a 52-week low recently. Let's look at how it got here and whether dark clouds are ahead.

How it got here
Zynga's brief life in the public eye has been a roller coaster -- not uncommon for an overhyped IPO. The company went public six months ago at $10 per share, valuing the social game maker at $8.9 billion.

Its first public earnings release on Valentine's Day didn't go so well, with shares losing 18% the following day. Despite the seemingly impressive revenue growth, bookings growth continued to quickly decelerate. Zynga had rallied heading into earnings on news that it contributes 12% to Facebook's revenue, but investors suddenly realized they were asking too much.

Just last week saw Zynga's second public earnings release. The company managed to beat analyst estimates, yet the results were still disappointing as shares lost nearly 10% the next day. Zynga now relies on mobile offerings to drive bookings growth, which it's aggressively pursuing through questionable acquisitions like the $180 million purchase of OMGPOP.

So far, investors that bought shares at the IPO price have been disappointed, with shares below $10 as we speak.

How it stacks up
Let's see how Zynga stacks up with some of its game making peers.

ZNGA Chart

ZNGA data by YCharts

We'll add some more fundamental metrics to dig deeper.

Company

P/S (TTM)

Sales Growth (MRQ)

Gross Margin (TTM)

Net Margin (TTM)

Zynga 5.1 32.2% 68.8% (41.6%)
Activision Blizzard (Nasdaq: ATVI  ) 3 (1.4%) 63.1% 22.8%
Electronic Arts (Nasdaq: EA  ) 1.3 0.8% 59.8% (4.5%)
Glu Mobile (Nasdaq: GLUU  ) 4.5 (3%) 72.3% (31.9%)
Take Two (Nasdaq: TTWO  ) 1.4 (29.3%) 38.1% (7.5%)

Source: Reuters. TTM = trailing 12 months; MRQ = most recent quarter.

The lack of profitability is certainly not specific to Zynga, as many other video game makers suffer the same fate, even stalwarts like EA. Activision and EA enjoy franchise and brand strength, while they are also strategically shifting to mobile platforms. Take-Two is currently still working on the next iteration of its smash-hit franchise, Grand Theft Auto IV. Glu Mobile also uses the freemium model that Zynga does, getting rid of up-front costs in favor of in-app sales of virtual goods.

What's next?
There are two potentially game-changing positive catalysts for Zynga in the foreseeable future: its own platform and legalized online gambling. Starting its own platform will help it distance itself from Facebook, and if legalized online gambling becomes a reality, Zynga already has a big presence in play-money poker that it can leverage into the real deal.

Interested in more info on Zynga? Add it to your watchlist by clicking here.

Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Take-Two Interactive Software; and creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy.

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