Can Zynga Overcome Its Greatest Threat?

Mobile gaming trouble-hive Zynga (NASDAQ: ZNGA  ) reports earnings this week that will hopefully appease investors' and analysts' long-running concerns. As of the last earnings statement, the company was facing headwinds in the customer retention department, while the C-suite had to install a revolving door. The biggest question on Thursday afternoon may not be whether the company is in the black or red, but rather the focus will be on stabilizing its user base, the stickiness of its games, and whether its efforts at online gambling are progressing at a rate that can salvage the company.

Crash cart
Last April, Zynga was able to deliver a profit to investors that doubled as an earnings beat, along with a healthy-looking bump in EBITDA (up 66% over the prior year's number). Though revenue dipped, investors seemed encouraged that a turnaround was in store.

One glaring issue, though, was its user retention. For that quarter, daily active users hit 52 million, a drop of more than 10 million year over year. Monthly active users dropped 50 million to 250 million. These numbers represented a record low -- a scary thought for a company that went public only a year before.

Since then, the biggest piece of news out of the company was founder and CEO Mark Pincus' abdication, which sent shares rightfully higher. Pincus, though undoubtedly a smart and capable founder, was not a great CEO. He is, however, staying on as chairman and chief product officer. A more concerning executive exit was that of Dan Porter, the creator of Draw Something and a high-profile member of the Zynga team following the $180 million acquisition of OMG POP! (Porter's company). That Pincus-driven buyout has since been written down to nearly nothing on the balance sheet.

So what should investors expect come Friday, as well as further down the road?

One small loss today, one big threat for tomorrow
In April's earnings release, management guided for a $0.03-$0.05 per share loss for the coming quarter. Disappointing, sure, but not a terrible number given the intense investments the company must make to steer the ship away from the giant iceberg that is irrelevancy.

Zynga has the online gambling venture, which admittedly has potential, along with its new CEO, former Microsoft Xbox honcho Don Mattrick. Mattrick was responsible for the Xbox's tremendous success, and before that he led an effective turnaround over at Electronic Arts. It was reported that Mattrick had wanted Microsoft to acquire Zynga a few years back.

Still, the risk here is tremendous. Zynga's development costs for games that have falling user rates are too high. We've seen it again and again, every fad game is just that: a fad. Everyone plays them until no one plays them.

Zynga has a long road ahead of convincing not only investors and analysts that the company is worth a glance, but gamers as well. Friday's earnings report will show some status updates, but the long-term picture for investors is far more important in this case. Do not buy just on Zynga's earnings, whether bad or good. Take the whole story into account.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2556340, ~/Articles/ArticleHandler.aspx, 9/25/2016 11:48:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:00 PM
ZNGA $2.84 Down +0.00 +0.00%
Zynga CAPS Rating: *
EA $84.26 Up +1.09 +1.31%
Electronic Arts CAPS Rating: ***
MSFT $57.43 Down -0.39 -0.67%
Microsoft CAPS Rating: ****