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

How it got here
I wish I had nice things to say about Zynga after it hit another new low yesterday. I wish I could talk about value or great products in the pipeline, but I just don't see the future looking that bright for Zynga.

Last quarter's results were OK, and unlike a lot of newly public companies Zynga actually made money (on an adjusted basis). Revenue was up 32% to $321 million and adjusted earnings per share were $0.06, although actual earnings were a $0.12 loss. The problem is that Zynga doesn't really have a competitive advantage, instead clinging to its sale of fake money on Facebook (Nasdaq: FB). In the social media world you always have to have the next big thing, leading management to take chances on new games.

The latest blunder was a $180 million purchase of OMGPOP, the maker of Draw Something. The game took the world by storm earlier this year but it has lost 5 million users since Zynga bought it, about a third of the total it once had.

Unlike Activision (Nasdaq: ATVI), Electronic Arts (Nasdaq: EA), and Take-Two Interactive (Nasdaq: TTWO), Zynga has to rely on social gaming networks for most of its revenue. These networks have users that can easily leave and don't provide a high return on the money invested in games.

Company

Price/Sales

Profit Margin

Quarterly Revenue Growth

Forward P/E

Zynga 3.5 (41.6%) 32.1% 16.0
Activision Blizzard 2.9 21.6% (19.1%) 11.0
Electronic Arts 1.0 1.8% 25.5% 10.5
Take-Two Interactive 1.2 (13.2%) (18.7%) 9.4

Source: Yahoo! Finance.

Shares have recovered some from their low yesterday, moving higher along with the market. But will it last?

What's next?
I just can't get excited about Zynga's future because I don't see any staying power with its business model. The competitors named above have brands that command millions of dollars of game sales and have customers clamoring for their next release. Zynga has free games that try to use gimmicks to get kids to buy fake money with Mom and Dad's credit card.

Our CAPS community agrees wholeheartedly, giving Zynga our lowest rating of one star (out of five). 273 players have given the stock an underperform call versus just 190 outperform calls.

Zynga went public with expectations that were too high and a stock that was destined to flop, just like many other Internet IPOs. There's a chance the company can build a sustainable business long term, but I just don't see it happening right now so I don't think this is a bottom. I'll stay away and wait for a big development like legalized poker or a new platform from Zynga before re-evaluating the stock.

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