Why Zynga Shares Popped

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  ) were reaching the next level today, jumping as much as 14% after its earnings report was not as terrible as the market feared.

So what: The social gamer saw revenue fall 36% to $203 million and posted an adjusted EPS loss of $0.02, down from breakeven, as cost-cutting initiatives helped cushion the sales drop. Analysts had expected a loss of $0.04 a share, while bookings of $156.1 million topped estimates at $142.7 million. Daily users dropped in half to 30 million as gamers flocked to mobile platforms, where Zynga is weaker. The company is remaking itself into a mobile gaming enterprise, and still relies on Zynga Poker, Words with Friends, and FarmVille to drive sales. Recently instated CEO Don Mattrick said he was pleased that the company's performance beat its guidance, and said, "I am confident that Zynga is rewiring itself in a meaningful way that will strengthen the core of our business."

Now what: Though it may look like it from the crash in revenue, this is a not a dead company. Zynga introduced several new games in the quarter, including Ninja Kingdom and Castleville Legends, and had three of the top ten games on Facebook as of the end of the quarter. Shareholders can also see a silver lining in the fact that the company still managed to nearly break even despite the sales decline. Fourth-quarter results aren't expected to be much better, but this is a fast-changing industry where Zynga could easily reassert itself. The stock is a risky bet at this point, but it's worth keeping an eye on Zynga by adding it to your watchlist.

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