Are Zynga's Losing Days Coming to an End?

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
Zynga hit the public market with a lot of fanfare because of its large army of game players, but so far as a public company Zynga has been a disaster. The latest quarterly report and squabbles with its major partner, Facebook (Nasdaq: FB  ) , have investors questioning the company's future even more.

In the second quarter, the numbers look impressive to those who don't follow Zynga closely. Revenue was up 19% to $332 million, daily active users grew 23%, and the company made a penny in per-share profit when adjusting for one-time items. But when we look at the trend quarter over quarter, which matters most in this fast-moving business, the numbers begin to look suspicious. Revenue growth slowed dramatically to 3.6%. On a non-GAAP basis, profit slowed from $0.06 in EPS to $0.01, and the company expects conditions to get even worse. Estimated bookings for 2012 were lowered from a range of $1.425 billion-$1.5 billion to a range of $1.15 billion-$1.225 billion. Non-GAAP EPS guidance was lowered from $0.23-$0.29 to a range of $0.04-$0.09, which means the company is likely to lose money in the second half of the year.

Facebook's move to promote new games over popular ones has also affected the company and has already led to lawsuits against executives and investors who the suits claims knew about the move before a $500 million offering in April. What really happened on that front is unknown, but it will be a distraction and has already led to a big decline in expected revenue and earnings.

Since Zynga came public, it hasn't been the only gaming stock to decline -- Electronic Arts (Nasdaq: EA  ) and Activision Blizzard (Nasdaq: ATVI  ) have also moved lower -- but it has far surpassed the losses of more established players.

ZNGA Chart

ZNGA data by YCharts.

Add to that the fact that established gaming players like EA and Activision are trading at more attractive multiples with positive profit margins and the story only gets worse.

Company

Price/Sales

Profit Margin

Quarterly Revenue Growth

Forward P/E

Zynga 1.7 (40.3%) 19.1% 25.8
Electronic Arts 0.9 1.4% (4.4%) 9.3
Activision Blizzard 2.9 21.6% (19.1%) 10.9
Facebook 9.1 13.3% 32.3% 32.3

Source: Yahoo! Finance

What's next?
So will anything save Zynga from going all the way to zero? I have my doubts. Zynga is reliant on games that have little competitive advantage, and it sells nothing tangible to players, unlike EA and Activision. Switching costs away from its games are zero, and with Facebook promoting other games, keeping players becomes more difficult.

I haven't liked Zynga since its IPO, and I still don't like it at this new low. And 311 CAPS players agree with me, resulting in a lowly one-star rating for the stock on our CAPS rating system.

For a more in-depth look at Zynga's business and its future prospects, check out our analyst report on the stock. It comes with a year of free updates any time there's major news and is a great way to learn more about the company. Click here for access.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Activision Blizzard and Facebook. Motley Fool newsletter services have recommended buying shares of Facebook and Activision Blizzard; and creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy. We Fools may not 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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  • Report this Comment On August 02, 2012, at 4:14 PM, IlluminatInvest wrote:

    TMFFlushDraw, your user name should help you recognize the value of Zynga Poker, especially considering that Pokerstars is acquiring Full Tilt's assets for $225m even though they have NEGATIVE $730m in cash that they owe customers compared with ZNGA's $1.6B.

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