Will Zynga Post an Earnings Win?

On Wednesday, Zynga (ZNGA) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. 

Zynga captured the attention of investors when it went public back in late 2011, as the popularity of social gaming led many to see great things for the company. Since the IPO, though, the game maker's shares have plunged, leaving many to wonder whether the company really has an edge over its rising competitors in the social-gaming space. 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 report.

Stats on Zynga

Source: Yahoo! Finance.

Will Zynga score higher this quarter?
In recent months, analysts have registered their skepticism about Zynga's earnings prospects, quadrupling their loss estimates for the just-ended quarter and going from an expected profit to a larger loss for the full 2013 year. The stock has bounced off much more severe lows, however, jumping nearly 25% since mid-January.

Zynga has been undergoing a huge transformation since it changed its partnership with Facebook (META -2.43%). What Zynga found is that even though its casual games built up a big mass of players, it was hard to make money from them. Moreover, Facebook had huge leverage over Zynga, as Facebook generated just over 10% of its revenue from Zynga early last year, while Zynga relied on Facebook for over 90% of its sales before beginning its transition.

The big news for Zynga recently was the culmination of its long-term vision to offer real-money games. Yet the full impact of the move will have to wait until the legalization of online gambling in the U.S. gains more clarity. As Fool contributor Michael Lewis estimated recently, even 10% penetration of their current Zynga Poker users into real-money gaming could produce $300 million in annual revenue -- a big bump in pushing the company toward profitability.

The real question is whether Zynga can hold off experienced casino operators if online gambling becomes a reality. Already, alliances are forming, with Boyd Gaming (BYD 0.30%) and MGM Resorts (MGM 1.24%) having linked up with bwin.party -- the same company Zynga tapped for its real-money Zynga Poker -- to help Boyd take advantage of newly legal online gambling in New Jersey. Zynga has the obvious edge with its social savvy, but established casino companies will have huge incentives to defend their turf if Zynga starts to make a serious dent in the industry.

In Zynga's quarterly report, watch especially for the impact of its new What's the Phrase knockoff of Wheel of Fortune. The hit should give some insight into Zynga's ability to keep profiting from free games. If it can't monetize even popular new games, then the company may make even more dramatic strategic shifts in the future.

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