Will Zynga Be Able to Sustain Its Mobile Momentum?

Zynga's first-quarter results show that the company is doing well in mobile, but will it be able to sustain the momentum?

Apr 28, 2014 at 8:05PM

Gaming company Zynga (NASDAQ:ZNGA) has started fiscal 2014 on the right foot. The company came out with first-quarter results that exceeded analysts' expectations, and the announcement that Mark Pincus is stepping down from his operational role also boosted investor sentiment. The gaming company's shares jumped 5% after the results were released. 

Driven by the performance of Farmville 2 and Zynga Poker, the company was able to deliver good results. Its shift toward mobile gaming also helped. Because of competition from Glu Mobile (NASDAQ:GLUU) and Electronic Arts (NASDAQ:EA), will Zynga's mobile moves lose steam? It's also worth noting that everything was not fine with Zynga's results because the company's revenue outlook was below consensus. Should investors bet on Zynga? Let's find out.

Positive moves worth noting
After posting relatively strong first-quarter results, Zynga is upbeat about its outlook and expects to deliver better results in the future. It is investing aggressively in marketing strategies and innovation to support its vision. Going forward, Zynga is planning to launch more games to attract gamers, and the positive performance of Farmville 2 has certainly given it some encouragement.

Zynga is working on various aspects to improve its bottom line. The company is focusing on diversification of its business through platforms such as mobile. This is the reason why Zynga had purchased NaturalMotion in January for $527 million. NaturalMotion has a good track record in mobile gaming and is well known for its racing games. The likes of CSR Racing and Clumsy Ninja have been downloaded tens of millions of times on different app stores. Clumsy Ninja, for example, hit 10 million downloads in the first week of its launch, becoming the no. 1 free game in the Apple App store. 

With moves like this, Zynga has strengthened its mobile gaming segment significantly. NaturalMotion brings well-known intellectual properties to Zynga and the talented team that created those games. It's easy to see why Zynga expects its mobile gaming business to grow more than its Internet gaming segment. In the first quarter, mobile bookings were 36% of overall bookings, and this is expected to grow further in the future. 

Some tough competition here
Growth in the mobile gaming segment will be tough to achieve. Both Glu Mobile and Electronic Arts are already deep into mobile gaming with several well-known franchises. Glu Mobile, for example, has games like Contract Killer, Frontline Commando, Eternity Warriors, and Deer Hunter to count on, and the recent addition of RoboCop and Motocross Meltdown has further strengthened its portfolio.

Glu is now looking to profit from the expected growth in action games. The company points out that almost 45% of revenue on consoles was from action and shooter in 2012. With the lines between mobile devices and consoles getting blurred, Glu is making the right move by going into action titles.

Electronic Arts, on the other hand, has also doubled down on mobile gaming. Last year, the company announced that it will launch some 15 mobile games in the span of an year. The advantage that EA enjoys is that it has a number of popular titles on consoles and PCs. It can leverage the likes of FIFA 14, Battlefield 4, Madden NFL 25, Need for Speed Rivals, and NBA LIVE 14 on the mobile platform quite easily. Since these games are already popular, they will find a good number of takers on mobile.

This is where Zynga falls short as it is still taking baby steps in mobile gaming. The acquisition of NaturalMotion is a good boost, but since the company has a failed history of acquisitions, investors shouldn't get too optimistic.

Bottom line
Zynga's revenue was down a huge 36% year-over-year in the first quarter. Although there were a few silver linings, investors shouldn't get too excited yet. Although the company is displaying some good growth in mobile, we should wait for a couple of quarters and see if Zynga is able to sustain its mobile success before taking a call on the company.

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Mukesh Baghel has no position in any stocks mentioned. 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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