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.
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.
Quarterly Revenue Growth
Source: Yahoo! Finance
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.