3 Things to Watch With Zynga

Zynga (Nasdaq: ZNGA  ) is an online social-gaming and mobile app distributor responsible for such popular games as Mafia Wars, FarmVille, and Cafe World.

Today, let's look at three things investors should be watching regarding Zynga, as they'll provide us with better insight into the company.

1. The Zynga-Facebook relationship
Absolutely nothing matters more to Zynga shareholders than its relationship with social-gaming mecca Facebook (Nasdaq: FB  ) . Zynga derives a vast majority (close to 90%) of its revenue from Facebook, therefore its dealing with the company and the ease of use for consumers in finding its games are essential to its well-being.

Recently, things haven't been going Zynga's way -- in case that 80% nosedive from its 52-week highs wasn't enough of an indication for you! Facebook's layout redesign is causing all sorts of chaos with regard to users being unable to find some of Zynga's game offerings.

In addition, growth for both companies is beginning to level off. Facebook's most recent quarterly results demonstrated 32% sales growth, but that's down significantly from just a few quarters prior, when it was doubling revenue year over year. Zynga's plight is even worse, with the company reporting a 10% decline in average revenue per daily active user. It may be hard to believe, but Zynga's already small number of paying users got even smaller relative to its pool of daily users.

In order for Zynga to be successful, it will need to be able to successfully coexist with Facebook while also looking for ways to expand its revenue stream beyond Facebook.

2. Development costs and its competitors
The next most important factor to Zynga shareholders, outside of its dealings with Facebook, is game development costs and keeping track of what its competitors are up to.

Without a doubt, game development costs are going through the roof across the sector. Console game producer Activision Blizzard (Nasdaq: ATVI  ) reported a 31% jump in research and development costs and a 51% rise in sales and marketing costs in its most recent quarter. Mobile app provider Glu Mobile (Nasdaq: GLUU  ) was even worse, with its research and development costs rising 86% over the year-ago quarter. According to the vice president of Electronic Arts (Nasdaq: EA  ) , Jeff Brown, gaming development costs are set to soar, which could spell trouble for Zynga, whose R&D costs soared 79% in the second quarter.

It's also imperative to note what the competition is doing. Electronic Arts hasn't been the quickest to catch on to the move into mobile and even social media, but it's boosted its digital product offerings to 36% of total revenue from 23% at this time last year. The simple fact that Zynga lacks a diverse base of customers is why shareholders need to keep a close eye on what its competitors are doing.

3. Zynga Poker
Go to Las Vegas and it's unlikely you'll find a deck of playing cards with a joker inside. But that's exactly what Zynga Poker is for Zynga -- an all-or-nothing bet on the legalization of online gambling.

Earlier this year both International Game Technology and Bally Technologies were awarded the first online gaming licenses within the U.S., potentially paving the way for future wins, which would allow them to legally sell their software to casinos, which could then utilize it online. According to GamblingCity, online gaming growth has averaged 23% since 2003 and is forecast to be bringing in $36 billion in revenue this year. If the U.S. does eventually legalize online gaming, Zynga already has a platform in place to take advantage of many Americans' natural urge to press their luck at gambling.

This make-or-break scenario could be the difference between Zynga having longevity in its business model and forever being on the edge of its seat with regard to the small barrier to entry that exists in the mobile and social media gaming business.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Zynga's successes and pitfalls in the future, which will hopefully give you a competitive investing edge.

If you're still craving even more info on the company, then I'd recommend our latest premium research report on Zynga. This report is geared for the long term and highlights the opportunities and threats that could affect Zynga's share price -- plus, it comes complete with a full year of regular updates. Click here to get this invaluable report  and claim your investing edge.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook and Activision Blizzard, as well as creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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