Should I Buy ZNGA Stock? 3 Pros, 3 Cons

Shares of Zynga stock have been sizzling in 2013

   

Should I Buy ZNGA Stock? 3 Pros, 3 Cons

Zynga (ZNGA) stock is on fire in 2013, up 57% year-to-date. And over the last 12 months, shares of Zynga stock have soared over 76%, nearly 50 percentage points better than the S&P 500.

zynga farmville 630 300x229 Should I Buy ZNGA Stock? 3 Pros, 3 ConsMeanwhile, ZNGA revenue is going in the opposite direction. And the future of free-to-play games like the ones Zynga offers continues to be brought into question.

So should you bother to buy ZNGA stock? Let’s take a look at the pros and cons.

Pros on ZNGA Stock

Don Mattrick. Sure, maybe you believe the former head of Microsoft’s (MSFT) Xbox division was pushed from his job after a disappointing reveal of Xbox One. But the reality is still that the Vancouver-born executive understands the ZNGA business. His new job is to get ZNGA making better, more profitable games while implementing a cost structure that’s more in line with its revenues. Zynga earnings in the third quarter — Mattrick’s first as CEO — saw the company’s net loss shrink from $53 million in Q3 2012 to $68,000 in Q3 2013. That progress is part of the reason why ZNGA stock is up so much in 2013.

Mobile Gaming. Data shows that 64% of mobile users play games on their devices on a daily basis. And if my wife is any indication (her addiction to Candy Crush Saga is legendary), I have no reason to doubt this number. Even more compelling, 31% of mobile users play games in bed. No wonder the birth rate is dropping. Of course, ZNGA needs to stem the losses in mobile active users. But with an entirely new management team, it’s certainly possible.

Free-Play Games. This is the wave of the future according to former ZNGA and Electronic Arts (EA) executive John Schappert. Quoted in the October issue of gaming trade publication Develop, Shappert said “I think the shift to free-to-play is real and happening.” In fact, Shappert established Shiver Entertainment to develop games for this market. That should show that there is also potential for bigger firms like Zynga — and should provide hope for ZNGA stock.

Cons on ZNGA Stock

Declining Revenues. This is definitely the elephant in the room. ZNGA saw its revenues decline by 36% in the third quarter and 28% in the first nine months of the year. Daily active users on ZNGA games are decreasing at incredible rate too, down 9 million, or 23%, from Q2 2013 to Q3 2013. Most importantly, its bookings (current revenue plus the change in deferred revenue ) in Q3 were $152 million — 40% less than a year earlier and 19% lower than in Q2. Until Zynga can turn this and its cost structure around, it’s definitely a red flag for ZNGA stock investors.

Facebook. ZNGA generated 77% of its Q3 revenue through Facebook (FB), which charges its users for virtual goods purchased when playing FarmVille 2, Zynga Poker and other ZNGA games. It’s unnerving to have one partner responsible for so much of your overall revenue — especially among chatter that FB is losing its “cool” factor.

Candy Crush. The most popular game on Facebook is going public. King.com has filed its S-1 to take the highly addictive Candy Crush public. Not only does Candy Crush have 10 times the users on Facebook compared to Zynga’s top games, it also leads the way at the Android Play Store and is the top-grossing game at the iTunes store in 19 countries. If Candy Crush continues its domination, ZNGA could become an after thought in the free-play gaming industry.

ZNGA Verdict

The global mobile games market is expected to be worth $24 billion by 2016. There’s too much cash at stake to think ZNGA stock is going to fold like a cheap suit and cede the market to King. Don Mattrick has Zynga focused on mobile gaming and now his team must executive at a high level.

So should you buy ZNGA stock? Yes — but with a couple of caveats.

First, the financials for ZNGA stock are still a tinderbox … although getting better. So if you buy Zynga stock, don’t bet the FarmVille. This is for speculation money only.

Then again, you can still own ZNGA stock by purchasing the First Trust ISE Cloud Computing Index Fund (SKYY), which invests in cloud computing stocks. This includes Zynga stock at a weighting of 3.46%. It’s a great risk-averse way to benefit from Don Mattrick turning ZNGA around.

And even if he doesn’t succeed and ZNGA stock falls flat, you have 38 other stocks to provide a buffer.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/znga-stock/.

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