Should I Buy Zynga Stock? 3 Pros, 3 Cons

by Tom Taulli | May 20, 2014 12:33 pm

For the first couple months of the year, Zynga (ZNGA[1]) seemed to be on the comeback trail. The stock shot up 50% by mid March. However, since then, Zynga stock has lagged, giving up most of those gains.

[2]It’s hard to believe that just a few years ago, Zynga seemed to be destined for greatness. Now, Wall Street has developed a very complicated relationship with the company.

Let’s face it, Zynga failed to make the transition from desktop games — with a focus on the Facebook (FB[3]) platform — to mobile. Meanwhile, rivals like King (KING[4]) filled the void and made a fortune.

Despite all this, could Zynga stock still have potential, making it a good buy at current levels? Let’s look at the pros and cons to find out.

Zynga Stock Pros

Leadership: Don Mattrick took the CEO spot of ZNGA back in July 2013 and wasted no time cutting back on the workforce, even letting go a variety of executives, as well as closed down some non-performing s games and studios. At the same time, he made the acquisition of NaturalMotion, which has created hit games like Clumsy Ninja and CSR Racing. But Mattrick’s advantage is his gaming background. Consider that he started his first company, Distinctive Software, when he was 17 and then sold it to EA (EA[5]), where he would eventually become the president of Worldwide Studios. In fact, he helped to create mega franchises like Need for Speed, FIFA, and The Sims. At Microsoft (MSFT[6]), he turned around the Xbox, getting the operation to profitability. Already this experience has had a positive impact on ZNGA, refreshing old games and focusing on new product development, resulting in promising titles like Hit It Rich.

Mobile Megatrend: According to IDC[7], the worldwide hours spent per month online on mobile devices was 12 billion in 2012. But by 2017, the number is expected to soar to 63 billion. IDC forecasts that mobile gaming revenues will grow at an 18.3% compound annual rate from 2013 to 2017, hitting $14.5 billion. While ZNGA was slow to transition to mobile, the company has certainly made up lots of ground. For 2014, the company expects that mobile bookings will surpass web sources. A big chunk of this has been with in-app purchases. But ZNGA is also getting traction with advertisers.

Financials: Even with the large drop in revenues, ZNGA still has been able to produce positive operating cash flows. What’s more, the company still has a hefty $1.1 billion in the bank. In other words, ZNGA is in a good position to fund new games or purchase companies.

On the negative side…

Zynga Stock Cons

Competition: Competition is intense for ZNGA. The company must fight against tough mega operators like EA, King and Supercell. They all have tremendous teams, franchise games and substantial amount of resources. But competition can also emerge from tiny firms, like we saw with Flappy Bird. Finally, Facebook may also become a factor because of its $2 billion purchase of Oculus, which develops virtual reality goggles. A key part of the strategy will be to develop immersive games.

Hits Business: The video game business depends on a constant stream of hits. Finding the next hot title can be extremely tough, and a company can easily get into a dry spell. Let’s face it, there are no easy ways to gauge the fickleness of consumer tastes. In the case of ZNGA, the company could be more vulnerable to this problem. After multiple rounds of layoffs, the morale may not be strong enough to encourage the right kind of creativity and ingenuity to create cool games.

Mobile Distribution: Distribution has become an tough problem for game developers. That is, with thousands of titles on the app stores, how can a title get any attention? Well, the common approach is to pay a fee for each install. In fact, this has turned into a huge business for Facebook. Twitter (TWTR[8]) has also recently entered the fray. However, the problem is that the fees for installs are far from cheap. As a result, as ZNGA moves into mobile, there could be more pressure on margins.

Verdict on Zynga Stock

In short order, Mattrick has made the right moves, thanks to experience with turning around operations and creating cool games.

But the challenges remain great for ZNGA. The company must deal with strong competitors, rising distribution fees and the difficulties of gauging consumer tastes. ZNGA still has a variety of strong franchises, however, and more than $1 billion in the bank.

During the latest earnings call, Mattrick insisted that 2014 will be the year of “growth.” Mobile continues to ramp up and the EO is making an aggressive move to refresh the desktop-oriented titles, as well as launch new titles.

So, should you buy Zynga stock? Yes, there is still lots of skepticism from Wall Street but the company could easily provide some nice positive surprises for next year or so.

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.

Source URL: https://investorplace.com/2014/05/zynga-stock-znga-pros-cons/

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