Why Zynga Shares Folded

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  ) plummeted 18% today after the social gaming specialist issued a disappointing outlook and said that it is abandoning plans to enter the U.S. online-gambling business.

So what: The stock has surged in 2013 on optimism over its online betting prospects, so today's announcement to scrap the U.S. gambling license -- coupled with downbeat guidance for the rest of the year -- is forcing Mr. Market to quickly sober up. And while Zynga's second-quarter loss narrowed to $15.8 million, versus $22.8 million in the year-ago period, an alarming 40% drop in its monthly average users suggests that its popularity and competitive strength continues to rapidly diminish.

Now what: Management now sees an adjusted third-quarter loss of $0.05-$0.09 on revenue of $175 million-$200 million, versus Wall Street's view of a $0.02 loss and sales of $216.2 million. "[W]e need to get back to basics and take a longer term view on our products and business, develop more efficient processes and tighten up execution all across the company," said CEO Don Mattrick. "We have a lot of hard work in front of us and as we reset, we expect to see more volatility in our business than we would like over the next two to four quarters." Given the huge uncertainty surrounding Zynga's short and long-term prospects, conservative Fools might want to keep watching from the sidelines.

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