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Will Gambling Save Zynga?

Michael B. Lewis
December 12, 2012

Over the past year, Zynga (NASDAQ: ZNGA) has been methodically losing at its own game. Shareholders as of Dec. 16, 2011, have watched 73% of their investment go down the virtual tubes. One of the few bull arguments remaining for the gaming company is its interest in gambling. Time will tell if this is the path to profitability for the beleaguered company, but this past week gave some renewed hope as the company officially applied for a gaming license with the Nevada Gaming Control Board. After a year of investor lawsuits, wonky management decisions, and general deterioration, is this a signal of an improving Zynga?

As the year ends, we all tend to become retrospectors, looking back at the past 365 days to see what it tells about the next round. People at Zynga, and its investors, are probably trying to avoid this as much as possible.

Besides the slide in stock price, the company had a troubling first-year run on the public markets. After the company released its dismal second-quarter earnings report, an investor filed to open a class action lawsuit against the company for misleading investors regarding lower user counts, delayed game releases, and the subsequent declining revenues. The company's deep-seated relationship with Facebook (NASDAQ: FB) gave Zynga a guilty-by-association stigma shortly after the 'Book's IPO debacle. A yearlong talent drain saw some of the company's top brass head over to competitors' offices. And of course, probably the worst event of the year was the company's mindless $180 million purchase of OMGPOP, a good portion of which has now been written down off Zynga's balance sheet.

To me, the hope for the company lies in its push into gambling.

When CEO Mark Pincus announced that the company had applied for a license from the Nevada Gaming Control Board, investors started hitting the buy button -- sending the stock up 7% last Thursday.

With Zynga's large user base, the company does have the potential to make an impact in the online gambling space, which was effectively shut down in the U.S. last year (though many say this will be reversed in the coming years). As one analyst notes, Zynga's first game was Zynga Poker, and it is to this day the most widely used online poker game (not using real money). So the company has a platform for the project, and the people to populate it.

There are a couple of concerns, though, and let's not forget that those who seek salvation in gambling historically get left out in the cold.

Nevada, unsurprisingly, has an online gambling system in place. Nevada's Sen. Harry Reid has been lobbyin