No Cigar for Zynga Inc

Zynga's (NASDAQ: ZNGA  )  recent quarterly report was probably better than expected, however better than expected might not mean much. Non-GAAP earnings were in line at a loss of $0,01 per share, and revenue was a little better than expected, totaling $168 million vs. analysts expectations of $147 million, but when one looks at the year-over-year picture, everything was down across the board:

  • Revenue was $168 million for the first quarter of 2014, a decrease of 36% compared to the first quarter of 2013

  • Online game revenue was $132 million, a decrease of 42% compared to the first quarter of 2013

  • Adjusted EBITDA was $14 million for the first quarter of 2014 compared to $29 million for the first quarter of 2013

  • Non-GAAP net loss was $6 million for the first quarter of 2014, compared to non-GAAP net income of $9 million in the first quarter of 2013

  • Cash, cash equivalents and marketable securities stood at $1.14 billion, compared to $1.54 billion as of December 31, 2013. A substantial decrease primarily due to the purchase of NaturalMotion last quarter.

The pace of deterioration seems to leveling off
The only bright spot was advertising and other revenue that came in at $36 million, an increase of 5% compared to the first quarter of 2013 and an increase of 49% compared to the fourth quarter of 2013. However that is not enough to make up for everything else. No cigar here.

Another bright spot might be considered the fact that bookings were 10% higher sequentially compared to last quarter, and daily active users rose by 7%. But again, looking at the year-over-year picture, the 28 million daily active users pale in comparison to the 52 million daily active users the company had the same quarter last year. So even though we see that things are leveling off on a quarter-over-quarter basis, the continues deterioration on a yearly basis is nothing to cheer about. No cigar here either.

An increased float is not investor friendly
Another issue that investors need to consider is the increase of the float. If a company's EPS and revenue growth is lower than the increase in the total outstanding number of shares (the float), then investors are basically losing in real terms, even if the company seems to be doing well.

ZNGA Shares Outstanding Chart

ZNGA Shares Outstanding data by YCharts

In Zynga's case however (as pointed out above), on a year-over-year basis the company continues to see deteriorating fundamentals across the board. If it was actually doing better, one can make a case for the increase in total shares (the float), but that is not the case.

And as per management's guidance for 2014, non-GAAP EPS is projected to be in the range of $0.01 to $0.03, based on a share count of approximately 930 million shares. Please note that today the total share count stands at 877 million shares, so that means additional dilution to the tune of about 6% by the end of the year.

In my book over the long term, and to the extent that Zynga continues to issues shares in this fashion, investors will be facing a headwind in their quest for long term price appreciation. Definitely no cigar here, and if anything else, this could be a reason for the market might punish the stock even further.

Warren Buffet says you have to buy at the right price, if you want to make money over the long term 
Against all of the above, there is also the issue of valuation. Zynga currently has a market cap of about $3.5 billion. Management's guidance for 2014 calls for revenue to come in between $770-$810 million, as compared to revenue of $873 million for 2013. For a company that is barely breaking even (an a non-GAAP basis), with decreasing revenue and with an increasing float, its market cap is not exactly a bargain. When a stock has a price/sales ratio of 4-5, the least you expect is decent growth and profits. Not the case here, yet.

Zynga is not the only kid on the block anymore
Competition today is a whole lot tougher than when Zynga started in the space. While Zynga pioneered the space, it is not the only one in the space. Today companies like King (NYSE: KING  )  are on the rise and catching up to Zynga fast, not mention many other start-ups like WoogaArkadium and Socialpoint. These companies are all backed by venture capital funding and will be seeking to raise capital from the market soon. And when that happens, these companies will be even more competition for Zynga, because they will be flush with cash. Even Zynga co-founder Eric Schiermeyer launched a new game studio called Luminary that is preparing to release its first game soon.

Now I would not call myself superstitious, but consider this: Google  (NASDAQ: GOOG  ) paid $182 million for  social gaming company Slide in 2010, and even after it poured about $200 million in the effort, it shut it down one year later. Google's decision to cut its losses short might mean that it does not see money to made in the long term. Of course Google might be wrong about this, but since I think the people at Google are a bunch of smart cookies, I do not consider Google abandoning its effort so fast as bullish for the sector.

Bottom line
Zynga's overall performance continues to deteriorate on a year-over-year basis, even if sequentially the deterioration is losing pace. 

But even if the company seems to be stabilizing, the current market cap, the fact that the company is still not profitable, the competition in the space and most of all, the dilution headwind that stockholders are facing, does not make Zynga a compelling long term play, yet.

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Read/Post Comments (8) | Recommend This Article (2)

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 May 01, 2014, at 2:05 PM, cowens210 wrote:

    What the hell is it with you guys at MF? everytime the stock is up, you have to post the same BS article? Everyday its a post about earnings, they were a week ago, we all know the numbers...try to report on something else, even though i know you have no talent and just regurgitate the same info over and over...youre like a parrot, you hear something and repeat it. ENOUGH IS ENOUGH, we get it your short zynga, stop trying to steal our hard earned money and get a real job.

  • Report this Comment On May 01, 2014, at 2:10 PM, cowens210 wrote:

    i subscribed just to respond to your post....you are trash! absolute garbage...your whole team of writers can all go to hell! same thing everyday from you HACKS...earnings were this blah blah blah...we know what earnings were! we read about it a week ago...its OLD NEWS, maybe try actually doing some research and report on something else.

  • Report this Comment On May 01, 2014, at 2:13 PM, cowens210 wrote:

    no one takes you guys seriously anyway....your name is a joke "motley FOOL" more like "motley TOOL" and your logo is a jester, LOL wow what a joke writing organization...hope you guys go down in flames, absolute trash reporting

  • Report this Comment On May 01, 2014, at 2:21 PM, cowens210 wrote:

    AND ANOTHER THING: dont think for ONE second that I dont see your little SCAM...you are a day trader and at the time of the article you say you have no positions in zynga, but whats to stop you from opening up a short position after you post it? you try to make it drop a quick 10 cents for a fast day trade huh? CROOK! SEC should shut you down

  • Report this Comment On May 01, 2014, at 2:25 PM, cowens210 wrote:

    love your use of the word "yet" too.....is that how you cover your arse? i got a news flash for you...people invest in stocks to make money as they go up in the future, so using the word yet is actually perfect to get in now, cause you don't want to be chasing the stock as it jumps up....so using the word "yet" means they will be soon, so now's the perfect time to buy...maybe i should do your job for you.

  • Report this Comment On May 01, 2014, at 2:36 PM, cowens210 wrote:

    You are obviously not a "smart cookie." Google dropped Slide because it was not making them any money...no one has even heard of Slide, what games did they have? no one knows....everyone knows Zynga, everyone knows Farmville and Zynga Poker and Words With Friends....are you kidding me right now?! You're trying to compare Slide to Zynga? Wow...why don't you tell us next that people should not trust Netflix cause Blockbuster went bankrupt. LOL you have got to be one of the oldest amateur writers i have ever heard of. So sad...do yourself a favor and stop reporting on companies to line your pockets with fast day trading profits...have some morals.

  • Report this Comment On May 01, 2014, at 3:20 PM, z06forum wrote:

    THE MF Goal is to keep the AVG Investor away or scare them into selling so they can buy options cheaper and also gain money on a short position.

    I know a few people who secumb to this which is a shame. Forget the noise..

    Not one article about what they are trying to do as a company and how they plan to get there. All the same what happened yesterday crapola. Nothing about the future, prospects and opportunitys.

    Pretty clear this is a One sided article..

  • Report this Comment On May 01, 2014, at 4:13 PM, GKesarios wrote:

    Well thanks all for the comments, however, as to the points in the article, does anyone have anything to say?

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