Zynga Earnings: An Early Look

With hundreds of companies having already reported quarterly results, we're now in the heart of earnings season. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Let's turn to Zynga (ZNGA). The social-gaming company has taken the industry by storm, changing the expectations that players have about how much they should have to pay and how often they play. But its shares have tanked since its IPO. Let's take an early look at what's been happening with Zynga over the past quarter and what we're likely to see in its quarterly report Tuesday.

Stats on Zynga

Source: Yahoo! Finance.

Can Zynga finally win?
Analysts don't have much hope for Zynga either this quarter or in the long run. Although a modest quarterly loss wouldn't wipe out Zynga's earnings for the year, analysts expect only breakeven results for full-year 2013 on a further 6% drop in revenue. Shares are still at depressed levels, although the stock has managed to gain almost 20% since early November's even more depressed levels.

When Zynga first went public, its connection to Facebook (META -11.88%) seemed like an unqualified positive, with the success of the social-media giant opening up huge potential for social gaming. Indeed, for a while, Zynga's influence on the industry was extensive, as its freemium model threatened Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (EA -1.00%) and their reliance on high-priced console games to drive revenue. In a tough economic environment, Zynga's offerings were both novel and inexpensive, two appealing characteristics to cash-strapped players, and both EA and Activision have had trouble driving demand beyond their highest-demand blockbusters.

But Zynga hasn't been able to innovate to a great-enough extent to take full advantage of its promising start. In fact, the company has had to shut down many of its less popular games, with Mafia Wars 2 among the latest batch of games that Zynga has cut recently. Moreover, Facebook has moved away from its early symbiotic relationship with Zynga, branching out to gain other sources of revenue.

The key to Zynga's report will be the extent to which its move into mobile gaming bears fruit. Having gone through extensive brain-drain within the company and with up-and-coming rivals trying to cash in on its business model, Zynga needs to come out with a coherent forward-looking strategy quickly if it wants to see its shares rebound.

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