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Why Zynga, Inc. Stock Fell 13% in July

By Asit Sharma – Aug 9, 2015 at 7:15PM

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Long-standing revenue concerns and investor nervousness over upcoming earnings hit the mobile gaming company in midsummer.

Zynga's latest game, "Mountain Goat Mountain," encourages players to "always be climbing." Image source: blog.zynga.com

What: Shares of mobile game creator Zynga, Inc. (ZNGA) fell 13.3% in July, according to S&P Capital I.Q. data.

So what: While there wasn't a single driving news catalyst during the month, Zynga's fall can be attributed to two factors. The first is continued investor skepticism that the company has a viable path to revenue growth. This concern is deeply rooted and can be traced all the way back to Zynga's IPO and the company's former overreliance on the FarmVille franchise:

ZNGA Chart

ZNGA data by YCharts

Investor nervousness in anticipation of earnings released in early August provided the second source of pressure on Zynga stock during the month. The second-quarter earnings report covered the first full quarter of founder Mark Pincus' return to the helm of the gaming company. Pincus had announced a number of changes after retaking the CEO position, including a $100 million cost-reduction initiative, and a trimming of the number of gaming categories the company would seek to compete in. Going forward, Zynga will offer titles only in the Action Strategy, Social Casino, Invest & Express, Casual, and Racing themes.

Now what: Zynga released Q2 2015 earnings on Aug. 6. The company reported bookings of $174 million during the quarter, above the top end of management's previous guidance range of $145 million to $160 million. Executives attributed the expansion in bookings partially to the increase in mobile gaming, which rose 30% year over year, propelled by the titles Slots, FarmVille: Harvest Swap, and the recently released Empires and Allies.

Zynga's transition to a mobile-gaming company was the greatest contribution of former CEO Don Mattrick, and management continues to pour resources into this area. Games played on mobile devices provided 66% of total bookings during the quarter. Investors who have held concerns over Zynga's long-term viability may be able to breathe a bit easier, as it captures more share in a market that by some estimates will reach $30.3 billion by the end of this year.

CEO Pincus also reported progress in the company's $100 million cost-reduction plan, and as a result, Zynga was able to book positive free cash flow of $1.1 million for the quarter. While this may not seem significant considering the company's total revenue of $200 million, consider that in the previous sequential quarter, Zynga suffered negative free cash flow of $49.1 million.

Investors appeared to react positively to these and other signs that Zynga is making slow but surefooted progress. A day after the earnings release, Zynga stock gained nearly 8%, and so far this month, it's recaptured nearly half of the midsummer swoon it saw in July.

Asit Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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