Why Zynga Is Worth Less Than $2 Per Share

A healthy cash balance should usually give investors confidence in a company. With cash, a company has options and something to fall back on if things aren't working out. With cash, a company can pay off creditors and stave off bankruptcy. With cash, a company can cover dividend payments to shareholders. However, there is a case when cash becomes a liability, and is worth less than its face value. And this specific case is where Zynga (Nasdaq: ZNGA  ) finds itself.

The value of cash
Let's say you can give $100 to revered investor Warren Buffett, or to a mangy, rabid bulldog frothing at the mouth. In Buffett's hands, that $100 could actually appreciate in value based on his decisions on how to utilize the cash. In a year, he could give you back $110. If given to the unfortunate bulldog, hypothetically named Zangy, and the dog manages not to ingest the cash, it might get buried somewhere. In a year, maybe you just might find where the dog placed it and get $100 back, but chances are the dog ate it, and you would be left with $0.

In the right hands, cash is a great asset. In the wrong paws, there is no reason to place any value in it.

Doghouse full of cash
Zynga currently has about $1.2 billion in cash and marketable securities. That's just a little under Electronic Arts' (Nasdaq: EA  ) $1.4 billion in cash and securities, even though EA boasts a market cap almost twice the size of Zynga's. On a per-share basis, that works out to be about $1.60 in cash behind Zynga's $3.20 stock price, a good 50%. EA, on the other hand, has $4.52 in cash per share behind its roughly $14 stock price. Obviously, investors have more confidence in EA's business, as less of the value of the company is cold hard cash.

But are investors right to discount Zynga's ability to be a successful business?

A look at past performance
Well, how has Zynga spent its money in the past? Not too well. In March, it purchased OMGPOP and its hit game (at the time) called Draw Something for $180 million. At the time, the game had 15 million daily active users. Today, according to AppData, the game has 2 million active users.

This poor experience hasn't dimmed Zynga's taste for acquisitions, though. The company is reportedly paying between $20 million and $25 million for game developer A Bit Lucky and its coming game Solstice Arena. The price is much more reasonable, but the game also has yet to be released and comes with zero users off the bat.

Continued poor investments will continue to discount any cash Zynga has left. And, the more cash Zynga spends, the less cash there is to support its stock price. Unless Zynga shows a new penchant for actual return on investments, investors should wonder if the cash portion of Zynga's share price, about $1.60 out of the roughly $3.20, will continue to hold any value.

Different paws
On the flip side, while many view the recent exodus of Zynga's top management to be a poor sign for its future, it is possible it could bring in the new thinking the company needs. This new thinking includes diversifying away from Facebook (Nasdaq: FB  ) , which has consistently been a source of over 90% of revenue, with more focus on mobile platforms and its own desktop platform. It should also include making games that retain their users longer. Whereas Activision Blizzard's (Nasdaq: ATVI  ) World of Warcraft user base declined from 12 million in 2010 to 9 million today over a few years, that rate of decline usually happens over a few months with Zynga titles.

Additionally, Zynga should watch out for industrywide rising game development costs. As fellow Fool Sean Williams points out, in the last quarter, Activision Blizzard's research and development costs rose 31%, Electronic Arts' rose 79%, and Glu Mobile's rose 86%.

Take your money and run
Personally, I don't trust Zynga's money-managing skills. And because it represents such a large part of Zynga's current value, investors should decide for themselves whether they believe management can successfully spend its way to a sustainable business. For a more in-depth look at Zynga's opportunities and threats, researched by our own analysts, along with three reasons to buy and sell, grab your copy of our new premium report.

Fool contributor Dan Newman does not hold shares of any of the above companies. Follow him @TMFHelloNewman.

The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook and Activision Blizzard. Motley Fool newsletter services have recommended 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.


Read/Post Comments (8) | Recommend This Article (8)

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 September 21, 2012, at 3:21 PM, possiblekicker wrote:

    How can posts like this come up as a news story? This guy doesn't even try to explain his calculation in coherent fashion. What is it about this stock that this website hates so much that they keep pushing this sort of stuff through?

    Motley Fool is just a platform for people who think posting drivel is going to move the price of a stock in a direction they want to see it go-and giving them a larger voice by way of their "news" credentials. I admit that I did not realize this before spending money on a subscription. it's pathetic and they "fooled" me!

  • Report this Comment On September 21, 2012, at 3:32 PM, TMFHelloNewman wrote:

    @possiblekicker

    Thanks for reading. I actually have no interest in Zynga's stock price rising or falling, as the disclosure states.

    The calculation, and gist of the article that I thought investors should take note of, is that a majority of Zynga's value is simply the cash it holds. And based on its past performance of using the cash, investors should heavily discount what the company can do with it. You're welcome to disagree of course!

  • Report this Comment On September 21, 2012, at 3:32 PM, xxdfensexx wrote:

    Perhaps the worst financial information site out there and, with the likes of The Street.com, that is saying a lot. Continual bashing of selected stocks, such as ZNGA, by regurgitating information that has long been available is this sites MO. Good rule of thumb, when 'The Fool' say's to buy then it is time to sell and vice versa. Zynga trading at $15/share warranted a sell rating but at the current PPS, especially with online gaming on the horizon, this stock is definitely a long term buy. Stop hiring High School students to write your articles and actually get some people that can write something half way informative.

  • Report this Comment On September 21, 2012, at 3:44 PM, TMFHelloNewman wrote:

    @xxdfensexx

    Thanks for reading. I can't help but feel you are offended due to a long position in the stock, and I hope that position works out for you. And you're correct, I did attend high school, in addition to a few other schools.

    I do think you'll find that the Fool's record actually beats the market, however. And I think you'll find some people who might consider this article at least half way informative.

  • Report this Comment On September 21, 2012, at 3:55 PM, XMFMadMardigan wrote:

    TMFHelloNewman,

    You're spot on. As far as previous comments, I would be angry if I was long a stock and read something negative as well, we're only human.

    Zynga's flavor of the week social games are great for generating a couple months of buzz. Does it translate to $180 million per game? I dont think so. If Zynga is able to consistently pump out games that are addictive for two months and then fade followed immediately by another, than there is a great business here. Unfortunately, thats not going to be the case. There is a reason its top talent has jumped ship as soon as possible.

    Keep up the good work. I'm going to go play draw someth...oh never mind. none of my friends use it any more.

  • Report this Comment On September 21, 2012, at 3:56 PM, Stockems wrote:

    Doesn't look like you are including their 426M in long term investments or 150m in receivables as part of their effective cash. Here was a better article on them

    http://www.forbes.com/sites/ericsavitz/2012/08/01/zynga-is-t...

  • Report this Comment On September 21, 2012, at 4:20 PM, TMFHelloNewman wrote:

    @TMFMadMardigan

    Thanks - I'll be playing Words With...darn.

    @Stockems

    True, and thanks for the link - I used the most liquid of assets. If you include those long term and receivables, then yes, the stock is even more based on its cash-like asset value.

    @Navitude

    I was always more of a colored pencil person.

  • Report this Comment On September 21, 2012, at 4:21 PM, SUPERMANSTOCKS wrote:

    Zynga will get approval for online gaming and you will see a huge change in the numbers. Its all about longterm

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