A healthy cash balance should usually give investors confidence in a company. With cash, a company has options and something to fall back on if things aren't working out. With cash, a company can pay off creditors and stave off bankruptcy. With cash, a company can cover dividend payments to shareholders. However, there is a case when cash becomes a liability, and is worth less than its face value. And this specific case is where Zynga
The value of cash
Let's say you can give $100 to revered investor Warren Buffett, or to a mangy, rabid bulldog frothing at the mouth. In Buffett's hands, that $100 could actually appreciate in value based on his decisions on how to utilize the cash. In a year, he could give you back $110. If given to the unfortunate bulldog, hypothetically named Zangy, and the dog manages not to ingest the cash, it might get buried somewhere. In a year, maybe you just might find where the dog placed it and get $100 back, but chances are the dog ate it, and you would be left with $0.
In the right hands, cash is a great asset. In the wrong paws, there is no reason to place any value in it.
Doghouse full of cash
Zynga currently has about $1.2 billion in cash and marketable securities. That's just a little under Electronic Arts'
But are investors right to discount Zynga's ability to be a successful business?
A look at past performance
Well, how has Zynga spent its money in the past? Not too well. In March, it purchased OMGPOP and its hit game (at the time) called Draw Something for $180 million. At the time, the game had 15 million daily active users. Today, according to AppData, the game has 2 million active users.
This poor experience hasn't dimmed Zynga's taste for acquisitions, though. The company is reportedly paying between $20 million and $25 million for game developer A Bit Lucky and its coming game Solstice Arena. The price is much more reasonable, but the game also has yet to be released and comes with zero users off the bat.
Continued poor investments will continue to discount any cash Zynga has left. And, the more cash Zynga spends, the less cash there is to support its stock price. Unless Zynga shows a new penchant for actual return on investments, investors should wonder if the cash portion of Zynga's share price, about $1.60 out of the roughly $3.20, will continue to hold any value.
On the flip side, while many view the recent exodus of Zynga's top management to be a poor sign for its future, it is possible it could bring in the new thinking the company needs. This new thinking includes diversifying away from Facebook
Additionally, Zynga should watch out for industrywide rising game development costs. As fellow Fool Sean Williams points out, in the last quarter, Activision Blizzard's research and development costs rose 31%, Electronic Arts' rose 79%, and Glu Mobile's rose 86%.
Take your money and run
Personally, I don't trust Zynga's money-managing skills. And because it represents such a large part of Zynga's current value, investors should decide for themselves whether they believe management can successfully spend its way to a sustainable business. For a more in-depth look at Zynga's opportunities and threats, researched by our own analysts, along with three reasons to buy and sell, grab your copy of our new premium report.
Fool contributor Dan Newman does not hold shares of any of the above companies. Follow him @TMFHelloNewman.
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