Zynga Inc: Hidden Progress

Recent large gains by Zynga, (NASDAQ: ZNGA  )  highlight the benefits of long-term investing around a concept or management team. The struggling social game maker was languishing, until it hired a new CEO with extensive industry experience. Ironically, a month after the hiring of Don Mattrick you could've bought the stock for around $2.75, or roughly the same price the stock traded prior to the announcement.

Mattrick experience includes building up Electronic Arts (NASDAQ: EA  ) and he was considered the architect of the Xbox at Microsoft. Following solid quarterly numbers, the stock plunged on angst that Mattrick wasn't making any progress. Outside of a proclamation that the company would double down its focus on social games, the new management team left analysts with limited details on new game development. It also had some wondering how it would allocate its $1.5 billion cash balance.

In the last month, the stock soared from $3.50 to over $5.50 on several announcements including; a substantial purchase of a game developer with interesting natural motion technology, and a couple hit games. Further excitement comes from progress in real money gaming progress -- Zynga Poker is a hit franchise. But Mattrick brought up an even more important concept at the recent Morgan Stanley conference that should have you pumped for the future.

Repeatable and sustainable
In the mobile and social gaming sector the biggest issue, for Zynga and Glu Mobile (NASDAQ: GLUU  ) , has been the ability to repeat successful games and improve the predictability of game development. You only have to look at the top grossing chart list from App Annie to see that the top games are from Supercell and King.com who were previously unknown developers. The top 20 list has a scattering of games from Electronic Arts and Zynga. The recent success of Deer Hunter 2014 from Glu Mobile and the suggestion from Mattrick that Zynga can push existing franchises to achieve the greater levels of success are encouraging signs.

In that regard, Zynga is making a major mobile push to release updates to the top franchises of Zynga Poker, Words With Friends, and Farmville by the end of the second quarter. You should definitely follow the progress of these games especially to see if Farmville 2: Country Escape can compete with Hay Day from Supercell and Farm Heroes Saga from King.com.

Real money gaming
One of the major hits to Zynga came after Mattrick made the announcement that Zynga wouldn't purse a U.S. gaming license. Investors were disappointed, but Mattrick wanted the company focusing on proven concepts instead of chasing a dream.

But, Mattrick made some interesting points at the technology conference. In particular, one key point typically haunts Glu Mobile. Not only does announcing a game long in advance provide competitors with the ability to dissect the idea, but it also typically leads to disappointment when those games are delayed. In this sense, investors need to be patient with the progress of the real money gaming genre. Zynga continues to release new slot games such as the Riches of Olympus, with the intent of some day porting it toward the potentially lucrative real money gaming sector.

Bottom line
With Zynga reaching a market value of $5 billion and an enterprise value slightly below $4 billion, the stock becomes more tricky to evaluate considering the lack of game development guidance. Ultimately, you need to believe in Don Mattrick, the current franchises, real money gaming, and the new technology purchased with NaturalMotion.

The stock might appear to be expensive now that it's trading at an enterprise value of five-times revenue, but the potential of social, mobile, and real money gaming have a long runway with huge potential upside. Now that other franchise games are exceeding $1 billion in revenue (and King.com might reach a market valuation of $10 billion on an IPO this year), Zynga investors should continue to hold the stock.

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