Zynga Can't Buy Its Way Out of This

Three hours is all it takes to become an overnight sensation on Apple's (Nasdaq: AAPL  ) App Store these days.

Rovio -- the maker of the Angry Birds games -- put out Bad Piggies on Thursday. It's a new franchise starring the same targeted pigs from the Angry Birds franchise. Tech blog TechCrunch reports that the $0.99 game was at the top of the App Store paid chart within three hours of its release.

Sorry, Zynga (Nasdsaq: ZNGA). You probably can't afford to buy Rovio.

Zynga has drawn attention for going out of its way to acquire developers of games that challenge its position as the king of the hill. Most notably, it shelled out $180 million earlier this year to purchase Draw Something app maker OMGPop.

Draw Something had been on top of Apple's App Store in the game category for weeks. The Pictionary knock-off had collected 35 million downloads, and if drawing games were going to be the next big thing in social gaming, Zynga figured it may as well add it to its collection.

Fittingly enough, Draw Something dropped off the top of the charts the day after the deal was announced. Rovio's Angry Birds Space debuted at the top of the App Store. 

It's not as if the "buy the disruptor" strategy was working all that well for Zynga. The market may have initially liked the OMGPop deal, but OMGPop also describes what has happened to Zynga in the months since the deal was struck.

Zynga shares have shed 79% of their value since the day after the buyout was announced. Put another way, Zynga's market cap has received an $8.3 billion haircut since shelling out $180 million for its acquisition.

We obviously can't blame OMGPop for Zynga's woes. Some of its marquee games on Facebook (Nasdaq: FB  ) began to lose players, and trying to make it up in volume -- putting out a wider variety of games -- only illustrated how fickle this market can be when the playing field is surprisingly level. Sure, established gaming companies including Zynga, Rovio, and Electronic Arts will have an advantage when they put out a new title, but there's always a fledgling OMGPop out there turning into an overnight sensation.

This could be why so many managers and executives punched out this summer.

The good news for Zynga is that it's flush with cash and profitable. However, now that growth has slowed, investors lack the catalysts for the stock to claw its way back up and out of the single digits. As long as profitability remains -- and that's certainly not a given -- investors can be comforted by the cash cushion. However, it's hard to get excited about the floor when the ceiling is so far away.

Playing to win
A new premium report is available detailing Zynga's challenges and opportunities. Want more? The report includes a free year of updates. Check it out now.

The Motley Fool owns shares of Apple, Facebook, and Zillow. Motley Fool newsletter services have recommended buying shares of Apple, Zillow, and Facebook. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple. 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.

Longtime Fool contributor Rick Munarriz wonders if there will ever be a FoolVille. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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  • Report this Comment On September 28, 2012, at 2:38 PM, possiblekicker wrote:

    What is the reasoning for this inept story? Are you trying to accomplish something meaningful?

  • Report this Comment On September 28, 2012, at 3:34 PM, SnarkyApple wrote:

    > Sorry, Zynga (Nasdsaq: ZNGA). You probably can't afford to buy Rovio.

    Well, you obviously don't know what you're talking about.

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