Should I Buy Zynga Stock? 3 Pros, 3 Cons

by Tom Taulli | May 30, 2012 7:30 am

Should I Buy Zynga Stock? 3 Pros, 3 Cons

Zynga185 Should I Buy Zynga Stock? 3 Pros, 3 Cons[1]Since coming public in December, Zynga’s (NASDAQ:ZNGA[2]) shares have had a wild ride. On the first-day of trading, the stock fell by 5%. But when Facebook (NASDAQ:FB[3]) filed for its IPO in early February, Zynga soared — hitting nearly $16.

Unfortunately, since then the stock has had a horrible performance. The price is now about $6, down nearly 8% on Tuesday. Perhaps a key factor is the lock-up period[4], which expired on May 29. Keep in mind that this prevents insiders from selling their shares.

OK, so should you buy Zynga stock now — since it’s much cheaper? To decide, let’s take a look at the pros and cons:

Pros

Dominant Player. Founded in 2007, Zynga was smart to leverage its games on the Facebook platform. As a result, the company has seen explosive growth. As of now, Zynga has 292 million active users in 175 countries.

Great Titles. Over the years, Zynga has developed highly addictive games. Some include CityVille, Zynga Poker, Draw Something, Hidden Chronicles, FarmVille, CastleVille, Words With Friends and Mafia Wars.

Zynga has also been aggressively moving onto other platforms, such as Google’s (NASDAQ:GOOG[5]) G+, Apple’s (NASDAQ:AAPL[6]) iOS and Tencent’s properties. However, the key to growth will likely be the company’s recently launched portal, Zynga.com, which will offer not only its own titles but those from third parties.

Business Model. Zynga has a proven track record of generating strong revenues. Basically, the company uses a freemium business model. That is, all the games are free, but users can buy virtual items to skip levels.

It’s actually a tough model to pull off. But Zynga has invested significant resources in building a state-of-the-art analytics system. In real-time, it crunches numbers to continually find ways to maximize revenues.

Cons

Talent Wars. The U.S. may be plagued with high unemployment, but there’s actually a shortage of skilled workers in Silicon Valley. Funded with a huge amounts of venture capital, many of them are looking to start their own outfits. This makes it tough for larger companies like Zynga to recruit and retain their best employees.

According to AllThingsDigital[7], Zynga CTO of mobile Laurent Desegur has left to join a start-up. In light of the importance of mobile, this is going to be a big loss for Zynga.

Hits Business. Even though Zynga has sophisticated analytical systems, they still can’t make up for a bad game. The fact is it’s not easy to consistently churn out interesting entertainment products.

To help, Zynga has ramped up acquisitions. But even this strategy has its perils. Just look at the company’s $183 million acquisition of OMGPOP[8]. At the time of the deal — back in March — OMGPOP’s Draw Something was on the top of Apple’s app store. Now it is ranked 23rd, and the number of average daily users has gone from 14.5 million to 7.6 million.

Mobile Shift. Over the past year, this has accelerated. It has hurt Facebook, which has struggled to find ways to monetize its mobile strategy. And given Zynga’s dependence on Facebook, there may ultimately be a slowdown in its games.

Verdict

In a short period of time, Zynga has built a franchise company. It also has about $1.7 billion in the bank, which will be key for acquisitions.

Yet the company will need to make a transition to mobile, which will likely not be smooth. In the meantime, investors have already been burned. Many lost money on the IPO as well as in the secondary offering, which was struck at $12 a share.

Clearly, it will take time to earn back the confidence of Wall Street. So, in light of all this, the cons outweigh the stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[9], “All About Short Selling”[10] and “All[11] About Commodities.”[12] Follow him on Twitter at @ttaulli[13] or reach him via email[14]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2012/05/Zynga185.jpg
  2. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA
  3. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  4. lock-up period: http://investorplace.com/ipo-playbook/avoid-the-secondary-offering-and-lock-up-period-pitfalls/
  5. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  6. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  7. AllThingsDigital: http://allthingsd.com/20120529/zynga-loses-its-cto-of-mobile-as-shares-trade-lower/
  8. $183 million acquisition of OMGPOP: http://investorplace.com/ipo-playbook/zynga-snaps-up-hot-gaming-operator-omgpop/
  9. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  10. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  11. “All: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  12. About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  13. @ttaulli: https://twitter.com/ttaulli
  14. email: mailto:tom@taulli.com

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