When it comes to earnings, Zynga (ZNGA) has a knack for missing estimates. Yet ahead of Thursday afternoon’s Zynga earnings report, investors are actually starting to warm up to the company. Zynga stock is ahead 27% since late August, which is encouraging … but caution is still advised.
For the upcoming quarter, the Wall Street consensus for Zynga earnings is a loss of 5 cents a share on revenues of $143.35 million. In the same period a year ago, ZNGA broke even on reported revenues of $255.6 million.
That said, Zynga earnings might not be the highlight of the report. Instead, investors could be looking to the company’s new CEO, Don Mattrick, for a clear strategy. He came on board back in July and has already made some key changes, such as pushing out the chief operating, technology and people officers, though that’s probably only the beginning of the cutbacks.
The overall headcount for ZNGA stands at 2,300, even after an 18% reduction in the summer. Meanwhile, other rivals are much leaner, such as Candy Crush Saga maker King, which not only has higher revenues (expected to reach $1 billion in 2013) but has just 600 employees.
Mattrick’s main challenge will be to come up with compelling games, which certainly be the key for driving Zynga stock.
The good news is Mattrick has a standout track record of understanding mass consumer tastes. During his tenure at Electronic Arts (EA), he led the development of breakout hits like the FIFA franchise, Need for Speed, Harry Potter and The Sims. He also was chief at Microsoft’s (MSFT) Xbox division, and turned that console into the largest gaming platform in the world with more than 80 million installations over its lifetime.
Also, Mattrick has some breathing room financially. ZNGA has $1.1 billion in the bank and no long-term debt, so he can invest in game development and even engage in a little dealmaking.
The challenges still will be tough, however. It takes time — sometimes more than a year — to create new games, so some of Zynga’s top employees might look for more attractive opportunities elsewhere. Other top companies like Facebook (FB), Twitter and LinkedIn (LNKD) are aggressively hiring talented engineers and designers.
Given all these risks — and the fact that ZNGA is in one heck of a hit-game drought — you might be better off not buying in before Zynga earnings.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.