Zynga (ZNGA) is doubling-down on mobile. In a surprise earnings announcement yesterday, the company announced it was shelling out $527 million for mobile game developer NaturalMotion. Based on the 21% pop in ZNGA stock, it seems Wall Street is upbeat on the transaction.
Zynga is a pioneer for games on the Facebook (FB) platform, like FarmVille, Zynga Poker and Mafia Wars. It also innovated the business model of selling virtual items, such as tools, equipment and capabilities for getting an edge when playing games.
Yet over the past few years, ZNGA stock missed the mobile megatrend. As a result, it has been playing catch-up and even brought on a new CEO, Don Mattrick who came on board about six months ago.
His initial focus at ZNGA has been on streamlining the organization, which has included three rounds of layoffs. In fact, Mattrick announced another round yesterday, coming to about 15% of the workforce or 314 employees.
As seen with other top operators in mobile gaming, like King.com and Supercell, companies don’t usually need headcount to be successful. If anything, it seems better to have smaller teams working on projects. Mattrick knows that, and is trying to refocus the company to strengthen ZNGA stock.
The purchase of NaturalMotion looks like a smart move. The company has top selling mobile games like CSR Racing, Clumsy Ninja and My Horse. It also has unique technology, called Euphoria, which allows for body movements that look real.
As smartphones and tablets get more sophisticated — and telecom networks move to 4G — there will be growing demand for high-end graphics. We’re already seeing that demand in the console market, and the sooner that mobile gaming companies prepare for it, the better off they’ll be.
Despite all this, investors should approach ZNGA stock with caution. Acquisitions for gaming companies can be dicey. After all, ZNGA spent $183 million for OMGPOP a couple years ago and the deal turned out to be a disaster. The company’s Draw Something title quickly tanked.
Perhaps more worrisome, ZNGA stock continues to show worrisome user trends. From 2012 to the end of last year, the number of monthly active players crashed from 311 million to 112 million.
That decline in users has been devastating on the company’s financials. In the fourth quarter, sales tumbled 43% to $176.4 million. The Street was forecasting $183.5 million. And for the current quarter, ZNGA stock is projecting sales of $155 million to $155 million, which falls short of the consensus forecast of $164.2 million.
Granted, Mattrick has done a fine job so far — he seems to have stabilized ZNGA, which is the first step toward a ZNGA stock recovery. Mattrick indicated that the declines in bookings have bottomed out and that there should be growth for the year.
However, the fact remains that the mobile gaming market is hyper competitive and users can be fickle. And it’s still extremely tough to come up with a breakout hit, which ZNGA sorely needs. ZNGA has failed miserably on this front over the past couple of years, and until the company can fix that problem, ZNGA stock will suffer.
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.