Why Zynga Shares Were Rocked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Zynga (NASDAQ: ZNGA  ) , a developer and marketer of online social games, dropped as much as 14% after the company announced plans to cut jobs and guided toward the low end of its previous bookings forecast.

So what: Zynga announced that it plans to cut a sizable 520 jobs -- roughly 18% of its workforce -- by August in order to save $70 million to $80 million annually. The move is being made as gaming competition and the costs of game development are steadily rising. The cuts will encompass all divisions of its workforce. Zynga reaffirmed its second-quarter EPS forecast, however, it also commented that bookings will be in the lower half of its previous forecast because many games outside of its Farmville franchise are underperforming. Despite the underperformance, Zynga also stuck to its previous full-year EBITDA guidance.

Now what: Yuck, and more yuck! That professional opinion is based on the fact that the social gaming industry is built on rising development costs with a declining base of customers that appear willing to pay for premium aspects of these "free" games. I suspect Zynga is going to have a difficult time staying profitable even with these expense cutes, and its high-growth days appear to be nothing but a mirage now. If online gaming were somehow legalized in the U.S., Zynga Poker may have a shot at making this a viable investment. As of now, though, I'd have to say there's absolutely no enticing reason to own Zynga stock and would suggest keeping a safe distance.

Is this the end for Zynga?
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 about Zynga. Click here to access your copy.

Craving more input? Start by adding Zynga to your free and personalized watchlist so you can keep up on the latest news with the company.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On June 03, 2013, at 4:21 PM, gabypanama wrote:

    Interesting. Although the last paragraph, with the pressure to get the "premium research report" make it sound more like an infomercial than as a serious analysis.

  • Report this Comment On June 04, 2013, at 9:27 AM, CatchTwentyTwo wrote:

    Gaby, pretty much every fool article ends like this. They have to make money somehow and I will say the premium research is quality. Nevertheless, take these articles for what they are and that is good guidance.

    The author is correct in his argument that until gaming laws change across the board, Zynga is not going to be wildly successful. With that said, monitor the news about these gaming laws, just imagine the potential of gambling from cell phones! Nevada and I believe New Jersey has approved these laws, so just wait to see the success of these test states, and perhaps if the news is good the rest of the states will follow.

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