Breaking it off with a loved one on the eve of the most romantic holiday of the year can be heartbreaking, almost cruel. Zynga (Nasdaq: ZNGA) had high hopes of being investors' valentine with its first earnings release as a public company last night. Shares had rallied to all-time intraday highs of $14.55 yesterday on those same hopes, a whopping 37% jump since Facebook laid out the extent of their relationship.
The morning after
Shares have sold off by as much as 16% as of this writing, as the dreadful feeling of morning-after remorse sinks in after investors are now sobering up from the Facebook-driven euphoria. How bad could the digits be?
Revenue soared by 59% to $311.2 million in the fourth quarter, topping the market's expectations. Working our way to the bottom, Zynga's GAAP net loss was a monstrous $435 million, compared with the $43 million profit last time around. A huge chunk of that was related to $510 million in stock-based compensation expenses for restricted stock that hadn't been recognized until the IPO.
On a non-GAAP basis, net income shrank 41% to $37.2 million, or a nickel per share. Bookings rose 26% to $306.5 million, while adjusted EBITDA fell 34% to $67.8 million.
Looking at the full year, revenue jumped 91% to $1.14 billion, while generating a GAAP net loss of $404.3 million, including the aforementioned stock-based compensation. That comes out to a loss of $1.40 per share. From a non-GAAP perspective, earnings per share dropped from $0.38 to $0.24.
Are you engaged?
Zynga tracks its user base in a few different ways -- daily active users (DAUs), monthly active users (MAUs), monthly unique users (MUUs), and average daily bookings per daily active user (ABPU). Looking at these figures, the trends appear reasonably healthy on the surface.
Source: SEC filings.
With no glaring dropoffs and increasing ABPU, especially in the context of no blockbuster game releases, why are investors so disappointed with Zynga's digits?
Zynga to investors: "It's not you, it's me"
Two words: growth and valuation. The social-game maker is trading at astronomical valuations right now of 164 times earnings. That's a massively premium valuation, partially spawned from all the Facebook hype, that needs to be justified by similarly sky-high growth. This is where the story starts to unravel, as Zynga's revenue and bookings growth have been plummeting on a sequential basis.
Source: SEC filings.
While it's entirely natural and expected for any up-and-coming growth stock to show some signs of slowing growth as they grow their revenue base, it's also entirely natural and expected for short-sighted investors to bid up one of the most overhyped IPOs in recent months in the face of the mother of all hyped-up IPOs for a related company in the pipeline.
Bookings represent the total revenue that is brought in from the sale of virtual goods and is a proxy for what Zynga would see as revenue if it was all recognized immediately at the time of sale. Instead, revenue is deferred and recognized over the life of those virtual goods as they're consumed, so bookings are an incredibly important precursor to revenue.
You'll notice in that previous chart that revenue was starting to catch up with bookings as it was recognized, and revenue recently outpaced bookings in dollar terms, casting doubts on how much Zynga's top line can keep growing.
Zynga's recent rally was hardly justified, and shares had reached unsustainable premiums, so it's hardly a shocker when the prospects of slowing growth question the company's ability to monetize its user base.
Maybe a trial separation would be good for us
I still think Zynga has even more downside from here, because of its still-sky-high valuation and shrinking growth prospects. The company's market cap is about $8.5 billion right now, higher than game stalwart Electronic Arts (Nasdaq: EA) at $5.9 billion, a game maker that's been around for nearly three decades and has much greater brand strength with its franchises.
Fellow freemium social-game maker Glu Mobile (Nasdaq: GLUU) is also on my bad side, since I don't think it's a sustainable business model for the industry. Glu is also seeing a separation from reality.
I'll give Zynga one potentially major growth catalyst: the possible legalization of online gaming (the gambling type). Zynga Poker is incredibly popular on iOS, and the prospect of converting all those players into real cash cows could be juicy. That said, if online gaming is legalized, there would be a gold rush of companies wanting to cash in, including capable gaming heavyweights like Wynn Resorts (Nasdaq: WYNN) and MGM (NYSE: MGM), both of which have already been looking for potential partnerships if the light turns green. It's an interesting possibility, but one that's too far away and uncertain to start banking on.
As it stands, Zynga is better off as a one-night stand instead of one to settle down with. Considering that we Fools are typically in for the long haul, Zynga will never be my valentine.
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