Video game developer Zynga (NASDAQ:ZNGA) has been a terrible investment since it went public in late 2011. Shareholders that bought in at the IPO may have lost a staggering 70% of their investment.
But at this point, trading at less than $3 per share, Zynga may be an interesting stock. For those who may be considering it, I outline the case for, and against Zynga below.
The bear case: One disaster after another
The bear case against Zynga is fairly straightforward: It's a lousy company, whose relatively brief history has been defined by a series of -- in some cases dramatic -- failures. It faces brutal competition, and it isn't profitable.
When it went public, Zynga's business was based on a collection of social, free-to-play games aimed at casual players and built, primarily, on Facebook's platform. Titles like FarmVille, Mafia Wars, Words with Friends, and Zynga Poker enthralled millions of users and spread like a virus -- games were inherently social; players were incentivized to encourage their friends and family to play (lest they have no one to play with).
But the business model proved transitory. Today, casual games are as popular as ever, but they're primarily played on mobile devices and distributed through app stores. Many of the more popular titles in the space (such as King Digital's Candy Crush Saga or Glu Mobile's Kim Kardashian: Hollywood) encourage players to spread the word, but also offer a robust a single player experience, ensuring that players whose friends have moved on can still enjoy them.
Zynga's business model proved ill-suited for this transition. Players began to leave its games in droves, and it was unable to replace them. It tried to buy its way back into relevancy (it spent about $180 million on OMGPOP). It briefly flirted with online gambling (a plan that was later dropped). Nothing has worked.
Founder Mark Pincus hired Xbox head Don Mattrick to replace him and run the company in 2013, but in the nearly two years since he's been hired, Mattrick has shown precious little. In February, Zynga turned in yet another poor earnings report. In 2014, Zynga's revenue contracted on an annual basis, but its losses grew.
The video game industry is brutal; the list of bankrupt developers is long. No matter how fantastic a game is, players will eventually get tired of it -- especially the casual sort of players Zynga targets.
The bull case: Mobile gaming is an enormous growth market
Zynga's history doesn't inspire much confidence, but investors who are looking for something a bit more speculative may find the stock to their liking.
Although Zynga's attempts at winning back its users have failed so far, the company really only needs one big hit to turn things around. Zynga has slowly weaned itself off of browser-based gameplay, and its business -- including its upcoming product line -- is increasingly centered around the rapidly growing mobile app market. Zynga's management believes that, by the fourth quarter of this year, more than 75% of its bookings -- the money its players spend on virtual items -- will be coming from mobile.
According to research firm Newzoo, mobile games brought in an estimated $25 billion in revenue last year, up more than 40% from 2013. That figure is expected to grow rapidly in the years ahead, and overtake traditional console gaming by the end of this year.
The mobile gaming market is lumpy -- and that's putting it mildly. A single title can completely bomb, or become a runaway success and generate billions. King Digital's Candy Crush Saga, for example, brought about $1.5 billion in gross bookings in 2013. SuperCell, another mobile game creator, saw its revenue triple last year to $1.7 billion, due largely to a single title, Clash of Clans.
Zynga has one title in the works that may go on to produce similar levels of financial success. Its upcoming game, Dawn of Titans, certainly looks impressive, with stunning, high-definition graphics that go far beyond standard mobile games.
Zynga has other plans, including a strategy game -- Empires & Allies -- and a new version of FarmVille with gameplay similar in nature to Candy Crush Saga. It's difficult to predict, but any of these games could become massive, overnight successes, and if they do, Zynga's stock should surge.
Finally, while Zynga certainly isn't a value stock, almost half its current market cap -- $2.5 billion -- is in cash ($1.1 billion).
Is a Zynga a buy?
As impressive as Dawn of Titans looks, Zynga remains a stock likely suited to the most speculative of portfolios. It needs its upcoming games to be hits -- and if they are, shareholders should be rewarded.
But hits are hard to predict. If Zynga can not grow its player base, the losses may continue to mount, and that cash pile could start to dwindle.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. 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.