Why Zynga's Stock Has Wilted in 2012

The first half of 2012 is in the rearview mirror, and investors are gearing up for what looks to be an action-packed ending. There are bound to be some big winners -- and more than a few duds -- no matter what happens in the United States and abroad.

Will your favorite stock have its victory lap as we hit the home stretch, or will it get passed by? First-half performances can hold some clues, so let's look to the recent past to find out whether Zynga (Nasdaq: ZNGA  ) deserves a place in your portfolio going forward.

First-half recap
Zynga has been one of 2012's worst-performing stocks, although investors entered 2012 on the rise. Despite an early 50% gain, Zynga's now shed nearly half the value it had on the first trading day of the year.

ZNGA Total Return Price Chart

ZNGA Total Return Price data by YCharts

Here are a few financial snapshots of its recent performance:

Market Cap $3.8 billion
Trailing 12-Month Revenue $1.22 billion
TTM Net Loss ($491 million)
TTM Free Cash Flow $136 million
Most Recent Quarter Revenue $321 million
MRQ Net Loss ($85 million)
MRQ Free Cash Flow $41 million
MRQ Revenue / Net Income Y-o-Y Change 32.1% / (600%)
P/E and Forward P/E NM / 48.6
Price to Free Cash Flow 27.9
Motley Fool CAPS Rating (out of 5) * (find out more)

Source: Morningstar. NM = not material because of negative earnings.What the numbers don't tell youThe story of Zynga's year is very much linked to the story of Facebook's (Nasdaq: FB) enormously hyped IPO. It's only appropriate, since Zynga and Facebook have such a symbiotic relationship. Facebook's first S-1 filing sent Zynga skyrocketing, as the social network revealed a surprisingly deep reliance on Zynga's browser games.

Despite that acknowledgement, Zynga's first earnings release as a public company underwhelmed investors. The company shook off that setback long enough to make its 2012 high at the start of March, when it announced its own games platform in an effort to strike out on its own, without Facebook. That was the end of Zynga's brief and somewhat unexpected ascent to a 50% gain, and shares have been in freefall ever since.

A secondary offering, largely an excuse for CEO Mark Pincus to unload a lot of shares, not only diluted the small IPO float but also sent the wrong image of a leader cashing out early.

Zynga's first-quarter results beat the Street's expectations but also showed the start of a slowdown in user growth rates. To fend off the appearance of stagnation, Zynga spent $200 million on one-hit-wonder game developer OMGPOP, which briefly held the coveted top spot in Apple's (Nasdaq: AAPL  ) App Store.

Since the purchase, OMGPOP's Draw Something has faded fast, and one of its developers walked away from a job at Zynga's offices, calling the company evil and actively destructive. Ouch. Zynga's CTO also left for a gaming start-up last month after falling in love with its technology, strengthening the firmly planted public image of Zynga as a place where nothing matters but the relentless pursuit of monetization.

That's not to say that Zynga hasn't made any positive moves. The company forged a partnership with Hasbro (Nasdaq: HAS  ) for the latter to develop real-world toys and games based on Zynga's virtual toys and games. Zynga also collaborated on a branded American Express prepaid card, which pays users back with Zynga currency rewards for real-world purchases. A marketing deal with DreamWorks Animation (NYSE: DWA  ) may offer a brief revenue boost as well.

Nothing's worked to reverse the stock's slide. Zynga's dawdled near all-time lows for a month, and its big "Unleashed" press event was a Hail Mary pass that went wide.

We at the Fool have warned investors about Zynga's false promise since its IPO. Rule Breakers analyst Tim Beyers calls Zynga a classic "Faker Breaker," a stock that just doesn't deserve its hype. I and my fellow contributors Travis Hoium and Sean Williams were unanimous in our thumbs-down vote on the stock this April, which is a relative rarity in our long-running Top Stock series.

Looking for a real Rule Breaker? You can get one great recommendation, straight from Fool co-founder David Gardner, in our free report on "The Next Rule-Breaking Multibagger." Don't wait until it takes off (again). Get the information you need for a great buy right now. Or if you're interested in learning about the potential opportunity and risk for one of the most interesting names in tech, grab your copy of the Fool's brand new premium research report on Apple.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights. The Motley Fool owns shares of Facebook, American Express, Apple, and Hasbro. Motley Fool newsletter services have recommended buying shares of Apple, DreamWorks Animation SKG, and Hasbro, creating a write covered strangle position on American Express, and creating a bull call spread position in Apple. 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. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (0)

Comments from our Foolish Readers

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 July 11, 2012, at 12:17 AM, totallyoblivious wrote:

    Cherry picked info and misinformation, hooray!

    You conveniently forgot to mention the $1 billion in cash they have on the books with zero debt, which is pretty significant given their $3.7 billion market cap.

    You also used a forward P/E of 48.6 from Morningstar, which is inconsistent with other sources. I see the average analyst's estimate being .27 for 2012 and .36 for 2013. That's a P/E of 18.6 for 2012 and 13.9 for 2013, neither of which is anywhere close to 48.6. Morningstar's estimate would give them .10 in earnings for the next 12 months, when they did .06 in the first quarter of 2012 alone. I find that number highly suspect.

  • Report this Comment On July 11, 2012, at 1:04 AM, jr0718 wrote:

    What is "the news"? ZNGA is the worst stock in 2012...we ALL know that. It will be more useful if you can make a case whether ZNGA is cheap at $5. forget about the past, let's talk about future. The market is really bad since March, that is when ZNGA & other high beta stocks have tanked. If the market turns bull at the end of the year like LAST YEAR, would ZNGA be a god buy then? Remember ZNGA tanked last year then went to $15 by March. Would March -2013 be better for the stock? What is your thought? THANKS!

  • Report this Comment On July 11, 2012, at 12:44 PM, rowbz wrote:

    You are once again misrepresenting (or misunderstanding) Mr. Desegur's role in the company. Zynga has many "CTO"s, which is what they call their technical division heads. The true CTO (i.e., director/officer) of the company is Cadir Lee, who is still very much dedicated to Zynga's mission.

  • Report this Comment On July 11, 2012, at 2:31 PM, Canuckistancat wrote:

    rowbz is correct. Mr. Desegur was a CTO of one of Zynga's many teams. He was not the CTO of Zynga (the C-level Exec.) It is common practice to refer to the technical lead on Zynga's teams as the CTO of that team. Please check your facts before posting misinformation in your articles.

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