Last week, Zynga Inc (NASDAQ:ZNGA) stock fell on news that founder Mark Pincus would reclaim the position CEO from former Microsoft Corporation (NASDAQ:MSFT) executive Don Mattrick.
By Friday, however, Zynga bounced back 4%, as the realization set in that even Pincus’ reputation can’t prevent the turnaround in Zynga that begun under Mattrick.
In a show of good faith, Pincus is taking a $1 salary, but is it enough to keep investors from feeling salty about the massive 2012 selloff in shares leading to a lawsuit? Probably not.
That doesn’t mean there isn’t hope for the gaming company.
ZNGA stock has skidded across the bottom for some time now, the days of its $7 billion valuation sorely behind it, and that’s actually good news for the company, which is now trading at a discount in a sector known for extreme valuations, giving the San Francisco company attainable growth benchmarks to hit.
Pincus Could be What ZNGA Needs
Pincus succeeds a long line of distinguished luminaries who left their post only to reclaim their position years later. Some have had success (Steve Jobs comes to mind), and some haven’t.
Relieving Mattrick was a strategic decision — Mattrick provided a seasoned guidance for the young, upstart company at a time when it needed structure most, and now Pincus is back to re-inject Zynga with the creative adrenaline needed to get gamers interested in a new, mobile-focused Zynga.
Speaking with the Washington Post, Jeff Sonnenfeld, an associate dean at the Yale School of Management, described the effect as “idiosyncrasy credit”:
“A weird rigidity sets in, where the successor starts to canonize what the founder created, and it’s only the founder who can come in and change it…Nobody is going to say to the founder: This is not what the creative gods would have wanted.”
And that’s why Pincus is back.
Zynga Isn’t The Same Company
Investors may’ve loved the revenue ZNGA brought in from its FB games like Words With Friends and Farmville, but Zynga’s social media games were long a source of ire among a distrusting gaming community who knew success on FB wouldn’t last.
For a game company to thrive, it needs to develop meaningful, quality games Zynga’s upcoming Dawn of Titans looks like the killer app Zynga and ZNGA stock so desperately need.
Dawn of Titans looks like a serious departure for the studio responsible for filling FB feeds with talk of crops and harvests, and some think it is not the type of game Zynga needs to catalyze mobile growth, such as this Seeking Alpha article, which describes Dawn of Titans as
“a game that alienates those who have traditionally been casual mobile game players; Zynga won’t be able to attract the old school, traditional player base that it is seeking.”
Wrong.
Trying to nail down a formula for some misguided notion of what “mobile gamers” or “PC gamers” want is what stained Zynga’s reputation in the first place. Zynga needs a big bang moment for its mobile division. Such a moment can’t easily be quantified and parceled out in neat bits that ramp up revenue, but is rather something we wanted all along but didn’t know it until we played it.
ZNGA Vitals are Fine
Zynga is still a giant in the gaming world. Its revenue over the last year is $690 million compared to the industry average of $95 million, and its balance sheet in good shape for future M&A and able to sustain a period of losses as the business turns around and adjusts to mobile sales. Its current ratio is 2.93, with no long-term debt on the balance sheet.
The shuttering of its web-focused games to favor mobile revenue means fewer costs for hosting and data as ZYNG restructures for mobile growth.
Last quarter, Zynga’s mobile captured 60% of all bookings and mobile customers were up 87% YoY. This year, ZNGA is aiming for 75% mobile bookings.
Earnings per share are expected to grow 125% next year — a drastic improvement from last year’s 300% decline — and analysts expect Zynga to grow 30% annually for the next five years.
The Bottom Line
Zynga stock is currently trading remarkably close to book value. Few tech companies have are so attractively valued. Sure, ZNGA revenue doesn’t look as good as it once did when FB games were at their peak, but the hole in revenue seems to be patched, and ZYNG is turning it around with promising mobile results.
Zynga stock is down from the high valuation of its earlier days, currently trading at a discount to the tech sector at large, an attractive investment so long as ZNGA can keep up its mobile bookings.
Don Mattrick was integral in setting Zynga on the right path, but despite all the backlash against Pincus, it may take the founder of the company to light a creative fire under its development process and thus its stock price.
