Zynga (ZNGA) is soaring, with ZNGA stock within 10% of its 52-week high and the video game company behind Facebook (FB) hit Farmville looking good for the final quarter of 2013.
ZNGA has climbed 25% in the past month, including an 11% jump in the past five days. Much of the recent growth in Zynga stock seems driven by optimism about expansions for FarmVille 2.
Investors might also be happy with the release of the new CastleVille Legends game from Zynga — a new version of the original CastleVille and the latest in the ZNGA line of -Ville games.
ZNGA stock has seen an interesting spike in short-term activity, according to Schaeffer’s Investment Research. Notably, most of the interest has been positive — call options — despite the fact that Zynga is sitting well above its average price target of $3.20.
So is ZNGA stock finally breaking out, or are investors just setting themselves up for disappointment?
Probably the latter.
ZNGA Stock Faces Headwinds
The fact that Zynga’s CEO Don Mattrick expects volatility for the next two to four quarters is a good indication investors should be cautious. After all, gamers are a fickle and capricious lot — as Zynga well knows after losing 45% of its users year-over-year last quarter. So even if FarmVille Legends turns out to be a hit, it doesn’t mean that Zynga has its mojo back.
Especially with Zynga stock facing competition from outfits like King.com, makers of Candy Crush Saga, investors shouldn’t expect one game (or two) to win back ZNGA users.
Zynga also needs to show improvement in mobile revenue, which was also down in the last earnings report. As Facebook is proving, finding a way to increase mobile revenues can be the difference between life and death for web stocks.
So while the apparent success of FarmVille 2 and CastleVille Legends is a good sign for ZNGA, it’s not an investment thesis. Remember, Zynga climbed 30% in the month before its previous earnings report … only to fall 14% the next day.
So if you’re convinced Don Mattrick is going to lead ZNGA to a recovery, wait until the company’s earnings actually show some improvement.
Otherwise, you risk getting caught up in a whirlpool of sentiment that could lead to declines in ZNGA stock.
Adam Benjamin is an Assistant Editor of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.
