Why Zynga Inc. Got Crushed Last Week

Social-game maker Zynga  (NASDAQ: ZNGA  ) had a bad week, mostly as shares got crushed on Thursday. The sell-off was in response to comments from CEO Don Mattrick at an investing conference on Wednesday. Freshly public rival King  (NYSE: KING  ) has EBITDA margins of around 40% right now, which is dramatically higher than Zynga's current level of profitability. Mattrick acknowledged that the company needs to perform better, but that this year is about investing in future growth.

Zynga's popular FarmVille franchise has been key to its rise over the years, but the company dragged its feet with bringing the title to mobile platforms. FarmVille 2 was launched just months ago, while Supercell launched its competing Hay Day back in June 2012. That's helped Supercell grow tremendously when combined with Clash of Clans

Management turnover has also been a red flag, which predates Mattrick's tenure. Even under Mark Pincus, Zynga's C-suite was a revolving-door affair. That may be over, as Mattrick has finalized his management changes and the company has laid off a large portion of its staff to cut costs.

In this segment of Tech Teardown, Erin Kennedy discusses Zynga's drop with Evan Niu, CFA.

(Relevant segment begins at 8:48.)

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  • Report this Comment On June 07, 2014, at 3:34 PM, VivaZynga wrote:

    Why do you have to bring up Apple and Amazon in an article related to Zynga?!

    Why do you have to compare a company with only one successful game (King) with one that has over 23 games played by millions across the world (Zynga)?

    Your following statement:

    "The sell-off was in response to comments from CEO Don Mattrick at an investing conference on Wednesday."

    is untrue and based on no factual evidence.

    Articles in which (1) departure of some managers, (2) body language and (3) comments from self-claimed analysts with unknown levels of education and motives (Bahatia) were the real causes of shaking weak hands.

    For departure of some managers (1), z06forum, has responded well:

    Removing the people who could not get it done nor had the knowledge to help before is a good thing. Don needs a clean slate and an energy to win. I am comforted that the Long time Colleagues who understand the work ethic and Tempo that Don brings to the company are flocking to Don's side as this transformation is taking place. It is now always easy to agree or understand the depths of the inner happenings of a company.

    Don has no reason to Fluff anything at this point. His job is to build a company. Any analyst who has an issue with not knowing the product pipeline has no clue or business being an analyst for Mobile gaming. The fragmented industry so far is all about copy cat games. Don is smart enough not to tip his company's hand just to satisfy some analyst for a qtr. I think this is the right thing to do. So funny that people in general bash the Military for announcing their doings while at the same time bash ZNGA for not. These games are IP and the way they work, look and feel are Trade secrets until launch. It takes months to develop and would not do their Marketing teams, innovators or developers any justice to give it away prior to the lanch. Like I said, these Ancient Analysts just don't get it. Don has stopped the bleeding and begun to increase metrics, this trend will continue with core games and accelerate as new Franchises reach consumers. Be patient and you will be with a winner.

    For body language rationa (2)l, Brad has responded very well:

    I've noticed several news stories recently based on supposed experts in body language. Perhaps it is just the newest flavor of the week, but body language is subject to individual interpretation and isn't that reliable. What makes this or that person an expert in body language? Do they have university programs on it? Obviously no. These are self appointed experts. Most of them work for the government so their findings will be favorable to the government, their employer. Dollars to donuts if we had a US body language expert analyze this and a Russian body language analyze the same piece of film they would come up with widely disparate interpretations. And since they want to continue collecting a paycheque their interpretations would make their country's leaders look good and the opposition

    and for opinion self-claimed analysts with unknown levels of education and motives (3), I have provided evidence for not being taken seriously:

    Bhatia published several negative articles driving the shares of Zynga down prior to the 4th quarter earning release, but after the earning release shares moved up sharply and eventually hit $5.85! Almost all of his predictions, late in January, were inaccurate:

    "He believes that expectations of a $0.04 per share loss in ZNGA's fourth quarter are optimistic, noting at the same time that the company is likely to guide first-quarter expectations lower. Specifically, Sterne Agee believes that first-quarter bookings will fall to $116 million with EBITDA at negative $17.2 million - a large change from bookings at $137 million and EBITDA of negative $3.5 million."

    Therefore, the sell off had nothing to do with Don's statement and vision for Zynga and should be taken as an opportunity to accumulate Zynga shares at these levels.

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Evan Niu

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at a major discount broker. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.

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