Zynga's Out, Activision's In

U.S. stocks are moderately lower this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.38% and 0.43%, respectively, at 10:10 a.m. EDT.

At the forefront of traders' concerns this morning is China. With economic growth slowing to a two-decade low last quarter, the Communist regime is ramping up its interventionism with a new decree ordering companies to shut factories across 19 industries in order to curtail supply and end what it believes is excessive price competition. Elsewhere in Asia, the 3% drop in Japan's Nikkei 225 on Friday is only adding to negative sentiment this morning.

Game on or game over?
It's all fun and games until your shares open down 17%, which is where social-game developer Zynga (NASDAQ: ZNGA  ) finds itself this morning following yesterday afternoon's earnings announcement.

The headline numbers did contain a glimmer of hope:

  • The company lost $0.01 per share on a pro forma basis, which was better than the $0.04 loss analysts were expecting. The quarterly net loss of $16 million is an improvement over the year-ago loss of $23 million.
  • Although quarterly revenue fell 31% year on year to $231 million, that was ahead of the consensus estimate of $186 million.

All the same, a near one-third drop in revenue is highly disconcerting, particularly if one considers that growth investors are the shares' natural constituency. Add to that the company's announcement that it will not pursue the online gaming market in the U.S. as a potential source of user and revenue growth, and you can see why some Zynga shareholders are calling it "game over" this morning.

"Getting a business back on track isn't easy and isn't quick, I know we can do better," Zynga's new CEO Don Mattrick told analysts and investors yesterday. I'm sure I agree with the first part of that statement.

Zynga is a pure speculation (and not a compelling one, in my opinion) -- investors mustn't allow themselves to forget this.

Meanwhile, another game developer, Activision Blizzard (NASDAQ: ATVI  ) , is having a different kind of morning, with the shares up 14%. The company is seizing its independence from Vivendi by buying back the bulk of Vivendi's shareholding, which will fall from 61% to 12% (an investor group led by Activision's CEO and its chairman will also participate in the transaction).

This is a company acting from a position of strength: It generates oodles of cashflow and carries no long-term debt on its balance sheet. Yes, it's in a hit-driven business, but between Activision and Zynga, I know where I'd prefer to put my money.

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