Zynga Wrings Out the Old

Zynga (Nasdaq: ZNGA  ) is carrying out its execution orders.

More Zynga games got nixed over the weekend. PetVille and Mafia Wars 2 became the latest games shut down by the leading social gaming company on Sunday.

PetVille -- where gamers tend to their virtual pets -- was never as popular as FarmVille or CityVille. And not enough Mafia Wars players migrated to the lightly trafficked sequel.

As tech blog TechCrunch points out, these are just two of the 10 games that Zynga has either taken down on Facebook (Nasdaq: FB  ) or pulled from mobile app stores. Another game -- Indiana Jones Adventure World -- recently stopped taking new players and has advised gamers that it will close down in two weeks.

Zynga's motive here is simply a matter of saving money. Why support a floundering franchise, especially when the company is better served by focusing on its winning properties? These days, the winners are few and far between at Zynga. Once a hyped-up growth stock, bookings are falling sequentially at Zynga. Obviously shutting down games is only going to make matters worse in the near term, but Zynga's hoping that shaving its overhead will help its bottom line.

In short, Zynga's trying to go from being a broken growth stock to becoming a value stock on the rise.

That part makes sense. Months before Zynga went public, analysts were tossing out valuations of as much as $20 billion for the former dot-com speedster. Since Facebook wasn't public at the time, investors were supposed to jump into Zynga as an overpriced play on the social networking giant's coattails. It didn't seem to matter that $20 billion would be more than what Activizion Blizzard (Nasdaq: ATVI  ) or Mattel (Nasdaq: MAT  ) -- the country's largest video game publisher and toy maker, respectively -- were worth.

It was a silly notion, though Zynga's eventual price tag when it hit the market at roughly $9 billion wasn't that far away from the more established Activision Blizzard or Mattel.

Now that the stock has shed nearly 77% of its value, the stock's net cash position accounts for two thirds of its current valuation. Analysts see Zynga posting small deficits over the next two quarters, but if it returns to profitability as the pros expect after that, Zynga's low enterprise value should cushion any setback.

The rub now is how the company deals with irate gamers. Players have invested time -- and, in some cases, money -- into these virtual diversions. These rightfully upset players have no reason to believe in Zynga. They will only have themselves to blame if they fall for another of the company's social realms that eventually gets shuttered.

Zynga's making a mistake here, and now it's apparently too late.

Zynga's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this newly public company. Being so closely tied to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about Zynga and whether it's a buy or a sell in our new premium research report. Don't even think about picking up shares before you read what our top analysts have to say. Click here to access your copy.


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