Why Zynga, Inc. Shares Plunged

Is Zynga's drop meaningful? Or just another movement?

Jan 16, 2014 at 6:19PM

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) dropped more than 12% Thursday following negative commentary from Sterne Agee analyst Arvind Bhatia.

So what: While Bhatia maintained his neutral rating on Zynga, he explained his checks indicate analysts may be too optimistic in calling for an adjusted fourth-quarter loss of $0.04 per share on sales of $138.82 million.

What's more, Bhatia claims Zynga's first-quarter guidance is "likely to disappoint" on lower-than-expected bookings -- the company's key measure for in-game virtual goods purchases -- and earnings before interest, taxes, depreciation and amortization. Specifically, he lowered his estimates for Zynga's Q1 bookings and EBITDA to $116 million and minus $17.2 million, respectively.

Previously, Bhatia had expected Zynga to turn in Q1 bookings of $137 million, with EBITDA of minus $3.5 million.

Now what: The call also comes on the heels of Zynga's decision last Friday to finally drop the axe on one of its oldest titles, YoVille, by March 31, 2014. And while it's not unusual for Zynga to shut down unprofitable games in favor of newer, faster-growing titles, the YoVille announcement, in particular, has drawn the ire of its years-old global community of players, who've even started a petition to boycott Zynga unless it chooses to keep the title around.

But this also underscores the challenge Zynga faces in continuously pumping out massively popular, low-priced games with which it has a difficult time keeping a large enough number of consumers entertained for any meaningful period of time. That's why I think, until Zynga can prove it can stem the bleeding and resume profitable growth over the long term, investors would be wise to stay on the sidelines.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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