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Is 2014 the Year Zynga Inc. Makes a Comeback?

By Tamara Walsh – Feb 3, 2014 at 8:30PM

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What to expect from Zynga in the year ahead.

Zynga (ZNGA) finished the first month of the New Year on a high note after posting a smaller-than-expected net loss for its fourth quarter. Shares of Zynga were also climbing higher last week on news that the game maker would cut 15% of its workforce in a move to rein in costs in the year ahead. On top of this, Zynga said it would buy NaturalMotion for $527 million -- marking the company's biggest acquisition to date. The perfect storm of announcements pushed Zynga's stock up nearly 20% in after-hours trading on Thursday. 

Now, the question is whether this could be the year Zynga makes a comeback.

Easy does it
With so much ground to cover, let's jump in with a quick rundown of Zynga's latest quarterly results. For the period ended in Dec. 2013, Zynga posted a 43% drop in revenue to $176.4 million, or a loss of $0.03 per share. That was slightly better than analyst expectations for a loss of $186.2 million or $0.04 in the quarter. Additionally, Zynga achieved modest growth in bookings across most of its gaming franchises.

Bookings are an important metric for the social game maker because they represent the total sale of virtual goods sold in the period. Zynga's Words With Friends game, for example, delivered the highest quarterly bookings in the game's five-year history, up 33% sequentially. Zynga Poker was also a standout game for the company in the quarter -- growing mobile monthly active users by 8% sequentially, according to Zynga. 

Source: Zynga.

Zynga's new CEO, Don Mattrick said he expects 2014 to be a growth year for the company. Let's hope he doesn't mean 'growth' by way of acquisitions, after all, we've seen how well that worked out for Zynga in the past.

The past repeated
Flash back to March 2012, when Zynga acquired rival game maker OMGPOP for roughly $200 million. At the time, OMGPOP was the company behind the smash hit Draw Something. However, after being purchased by Zynga, OMGPOP slowly died -- Zynga ultimately shut down OMGPOP just one year after buying it. 

Will Zynga's latest purchase of NaturalMotion share the same fate? Last week, Zynga said it would acquire the mobile game developer for $527 million in cash and equity. That seems a bit pricey for a company that's laying off 15% of its workforce in an apparent effort to cut costs. However, Mattrick hopes that buying NaturalMotion will give Zynga better footing in the all-important mobile gaming space. Specifically, Zynga will gain exclusive rights to the developer's mobile game engine called Euphoria. 

In addition to $391 million in cash, NaturalMotion's shareholders will get approximately 39.8 million shares of Zynga Class A common stock. A third of those shares will be issued to continuing employees to be vested over a three-year period, according to a press release. Unfortunately, given Zynga's past performance, there's no guarantee those shares will be worth much in the years ahead. Cynical as this may sound, Zynga has been in a downward spiral since its public debut in 2011.

There's no doubt 2014 will be a telling year for the San Francisco-based game maker. The latest onslaught of layoffs will save Zynga between $33 million and $35 million this year. However, firings and hasty acquisitions will only get the company so far. Ultimately, Zynga needs to find a way to consistently create new products and crank out hit games. Whether or not NaturalMotion will prove a natural fit for the game maker, only time will tell. For now, it seems premature to call this a Zynga comeback.

Tamara Rutter owns shares of ZYNGA INC. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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