Zynga (ZNGA) stock has had a strong start to the year, rising 14% while the S&P 500 has stayed mostly flat and other tech stocks have been the victims of a broad selloff. And the ZNGA first-quarter earnings report has sent Zynga stock dropping more than 2% today.
ZNGA posted an adjusted loss of 1 cent per share, hitting expectations on the nose, though that still represented a flip from a profit of 1 cent per share in Q1 2013. Revenues also declined considerably year-over-year, down from $263 million to $168 million.
There were a couple of positives in the Zynga earnings report. First, ZNGA posted its first quarter-over-quarter increase in revenue and active mobile users in two years. And mobile monthly active users grew 11% sequentially. Both metrics suggest that ZNGA is finding its footing after two years of sliding down, thanks in part to the efforts of new CEO Don Mattrick.
The fact that former CEO Mark Pincus is stepping down from his role as chief product officer is also fuel for Zynga stock bulls. That gives more control to Don Mattrick, the former Xbox chief brought in to turn ZNGA around.
If Zynga has hope of a bright future, it lies with Don Mattrick, who proved himself at Xbox by growing both the system’s install base and membership by several times over and made swift changes upon joining Zynga.
However, Zynga still provided investors with more reasons to worry than cheer.
In addition to shoddy earnings and revenue declines, user numbers still remain anemic. Mobile monthly active users might have increased by double digits, but overall MAUs are still only half what they were a year ago (123 million vs. 253 million). Granted, they also improved sequentially — from 112 million in Q4 to 123 million — but the company still has a long way to go to catch up to where it once was.
ZNGA is also increasingly reliant on a few games, which is untimately bad news for Zynga stock.
In Q1 2013, FarmVille 2 and Zynga Poker represented 26% and 21% of game revenue, respectively. Now, those games represent 30% and 24% of online game revenue. As ZNGA becomes more reliant on any particular game for revenues, Zynga stock is at an increased risk of stalling or sputtering out if users abandon that game and cut heavily into the top and bottom lines.
It’s troubling to see that, after a full year, ZNGA hasn’t produced another hit on the scale of those games.
Over on the financial side, Zynga still isn’t able to do much on the cash flow side. ZNGA has been flopping back and forth between positive and negative free cash flow for several quarters, and in Q1, cash flow flipped from $23 million in 2013 to -$25 million this year.
Zynga stock holders should be happy the results weren’t any worse — and Don Mattrick should be given serious credit for the changes he’s already made.
But while the company is at least hitting earnings estimates and maintaining its guidance for the full year, it still faces stiff resistance. Don Mattrick needs to find a way to draw more users back, preferably to new franchises that can take some of the pressure off of FarmVille 2.
Until then, the long term looks hazy for Zynga stock.
Adam Benjamin is an Assistant Editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.