Zynga, Inc Earnings: How Should Investors Play It?

Zynga (NASDAQ: ZNGA  ) , the maker of popular games such as FarmVille and Zynga Poker, proved that its turnaround strategy is on track this week after reporting strong earnings for its fiscal 2014 first quarter. "For the first time in two years, our teams delivered sequential growth across our key performance metrics including bookings, adjusted EBITDA, mobile bookings mix and audience," said Don Mattrick, Zynga's chief executive.

On Wednesday, Zynga also announced that founder Mark Pincus would step down from his role as chief product officer. The management shakeup comes less than a year after former Microsoft (NASDAQ: MSFT  ) executive Mattrick replaced Pincus as Zynga's CEO. Let's look at what it all means for the gaming company and how investors should play Zynga going forward.

The fine print
This is a transitional period for the social gaming giant as it continues to struggle with declining revenues. Zynga's revenue fell 36% in the first quarter to $168 million, down from $263.5 million in the year-ago period. Nevertheless, that was in line with Wall Street's expectations. The company posted a loss of $0.01 per share in the quarter, which was also on par with analysts' estimates.

More than this, Zynga achieved sequential growth in bookings, adjusted EBITDA, mobile bookings mix, and audience during the period -- all of which was welcome news to shareholders. Moreover, this is the first time in two years that Zynga has generated growth across all of these key segments.

The growth in mobile monthly active users was perhaps most encouraging as this suggests the company's turnaround efforts are starting to pay off. During the first quarter, Zynga delivered double-digit mobile audience growth of 11%. These results weren't game changing for the game maker, but they do suggest that Mattrick is the right man for the job.

Source: Zynga.

Meet the dream team
Pincus giving up his operational control at the company should be another good thing for Zynga going forward because it opens the door for fresh talent. He will stay on as Zynga's chairman of the board. Meanwhile, Zynga is adding a few notable hires into the mix including Alex Garden as head of Zynga Studios, Henry LaBounta as chief visual officer, and Jennifer Nuckles as chief marketing officer.

First up, Garden should be an asset to Zynga's technology division because of his past experience working with Microsoft's Xbox Live gaming network. While there, he helped expand Xbox to 41 countries and tens of millions of subscribers. Then there's Academy Award-nominated visual artist LaBounta. He will bring a fresh creative angle to the Zynga drawing board, while Nuckles will concentrate on the company's brand and marketing efforts.

These moves tell us that Mattrick is bent on getting the best possible leadership team in place to fuel the company's comeback. Shares of Zynga rallied in after-hours trading on Wednesday following this news. However, Mr. Market took back some of those gains yesterday, with the stock closing down nearly 2% at around $4.34 apiece.

How to play it, you ask?
The game maker's earnings report showed signs of a recovery in the business, while new management in key areas like marketing and technology is encouraging. Nevertheless, Zynga is still in the early stages of its turnaround. Investors need to keep in mind that these things take time, particularly with a company whose user base of gamers is notoriously fickle. It could take years for Zynga to regain investor confidence, which is why risk-averse investors may want to remain on the sidelines for now.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 25, 2014, at 6:21 PM, StayhomeMom2 wrote:

    Not too long ago, about 1 month ago I bought 15k shares for $5.75 a share. Now,you say "these things takes time" , however it doesn't take much time to fall from $5.8 to $4 and below!

    So let me ask you, How do you play it?! Please tell me!

  • Report this Comment On April 26, 2014, at 5:11 PM, callumturcan wrote:

    I shorted Zynga at $4.54 a few days before earnings with a small put option betting the stock would fall below $4. That's how I would recommend to play Zynga, every time time it reaches a "high" level ($5-6), short it through put options.

  • Report this Comment On April 28, 2014, at 11:42 AM, StayhomeMom2 wrote:

    Shorting it will cause others, and myself including, to lose money. Why would I want to short it?

    Is there another play other than short, so everyone will make money? instead of some win, the big investors; some lose, the small investor like me?

    Now I understand why they say the rich gets richer, the poor gets poorer!

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Tamara Rutter

I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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