Zynga, Inc Earnings: How Should Investors Play It?

Zynga reported strong quarterly results for its fiscal first quarter yesterday. But how should investors play the game maker going forward?

Apr 25, 2014 at 11:02AM

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.

Screen Shot

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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Tamara Rutter owns shares of Zynga. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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