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Zynga's a Razor-Sharp Falling Knife

When Zynga (NASDAQ: ZNGA  ) released its earnings last Thursday, there was little applause from investors, as pretty much everyone expected substantial drops in revenue and a minor loss in income as the company struggles to turn around and stabilize its hemorrhaging user base. What quickly became the headline of the report, though, was the company's unexpected abandonment of its real-money gambling venture, previously thought to be the key to the company's recovery. Now, investors will have to place their faith in newly minted CEO Don Mattrick to pull the company out of its deepest user slump since mid-2010, and bring the stock along with it.

Bottomed out
It wasn't just Zynga's dismal earnings that sent the stock down double-digits on Thursday, but there was certainly little to celebrate in the numbers, either.

For the quarter, the company reported $231 million in revenue, a 31% drop from the prior year's number. The driving force in the revenue drop was the continued slide in both monthly active users, which hit 187 million (the lowest since 2010), and daily active users, which declined to 39 million, a 45% drop year over year. Net income came in at a loss of $0.02 per share, which was actually $0.01 better than the year-ago quarter. Management noted that without certain items, earnings would have been just a $0.01 per share loss, $0.03 better than the Wall Street consensus.

Analysts noted that it wasn't earnings that narrowed the loss, but the company shedding 18% of its workforce and enacting other emergency cost-cutting procedures.

On its longtime business buddy, Facebook, Zynga lost its position as the No. 1 social gamer, losing out to, maker of the extremely popular Candy Crush Saga game.

As I mentioned previously, the company is exiting its real-money gambling venture in the United States, though it still has operations in the U.K. A concern voiced by many over the past year, the gambling regulatory environment in the U.S. made the business too risky to warrant further investments, even though there is some traction on the state level.

Zynga is experiencing the rock bottom of its multiyear mismanagement, overspending, and strategic failure to adapt to the shift to mobile. Could this be the inflection point, or is this an increasingly sharp falling knife?

If you must...
If investors are tempted by the low price on Zynga shares, they need to consider the options. As noted by CEO Don Mattrick, the company will remain volatile in its financial performance for up to a year while the new executive (and former Xbox head honcho) attempts to stabilize the company. An investment in Zynga is deep turnaround play without the deep value.

Other options include a possible buyout, which may be the best outcome for investors and the company itself.

The business risk here is tremendous, and a buyout would give investors a quick payday and allow them to move on to better investment ideas. Without some sort of unique, valuable insight into the future of the company, buying Zynga's crashing stock is not advised.

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Comments from our Foolish Readers

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  • Report this Comment On July 31, 2013, at 12:48 AM, Texasrecurve wrote:

    Thank you for the 345th time MF has advised me to avoid Zynga. Either you believe in Mattrick or you don't. I do and think he will show results pretty quickly. Give him 6 months and watch what happens.

  • Report this Comment On July 31, 2013, at 6:44 AM, TelsaRowe wrote:

    LOL texasrecurve, Just like JC Penny's "turn around". LOL, zynga is toast and I dont know a single company that would be stupid enough to buy them out. PC sales are falling off a cliff along with teenage Facebook users. Game over.

    They need to board up the conpany windows, sell off everything and return it to the shareholders. Then they need to issue themselves cease & desist orders.

  • Report this Comment On July 31, 2013, at 7:36 AM, stocks3066 wrote:

    Just like FB; sell sell sell. Stay Away, extremely overvalued and just after the majority retailers are convinced to bail its becoming the Wallstreet darling. In 3 yrs Znga will be a $5-10 stock. Ignore the noise, especially the so called experts in MF.

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