In 1997, Steve Jobs was brought back to save Apple Inc. (NASDAQ:AAPL) from the brink of bankruptcy. It’s safe to say that this was a well-thought out decision by the (now) world’s most valuable company.
Will this same recipe — bringing back a once-ousted founder — work for Zynga, Inc. (NASDAQ:ZNGA)? Investors in ZNGA stock certainly hope so.
Zynga CEO Mark Pincus retook control of the company just a few weeks ago. As ZNGA reported earnings Wednesday, he announced layoffs of more than 350 people — 18% of the ZNGA workforce — in an effort to cut costs and run a more streamlined company.
The market seems receptive — ZNGA stock is up more than 5% today. But Mark Pincus is no Steve Jobs. And unlike Apple, which — at the time of Jobs’ return — already had a loyal base of Macintosh enthusiasts, Zynga is only now building its presence in the world of online gaming.
ZNGA Earnings Report
For the quarter that ended March, Zynga posted a loss of $46.5 million, or 5 cents per share. On an adjusted basis when excluding one-time gains and costs, the loss was 1 cent per share, enough to beat estimates by a penny. First-quarter revenue climbed 9% year-over-year, reaching $183.3 million.
But here’s the thing — while Zynga did benefit from a slight improvement in online game revenue, advertising revenue continues to decline. And even when daily bookings (DAU) climbed 18%, it still marks a 9.5 percentage-point deceleration from the fourth quarter.
This is the metric that indicates how valuable each user/gamer is to Zynga. It helps Zynga determine where it can make the most from its platform investments.
Long-Term Prospects for ZNGA Stock
Zynga now operates in an environment where the market seems eager to punish anything with poor fundamentals.
Mark Pincus, to his credit, understands the challenges of the San Francisco-based company. And this explains the logic for chopping off 18% of Zynga’s workforce. But this won’t help ZNGA stock — not now, not in the next 12 months.
Sure, saving $100 million annually will give the appearance of better cost management. The layoffs will also show that Zynga is done “playing games” with its balance sheet. The layoffs, which Zynga says included savings of $55 million by eliminating outside and centralized services, is expected to be completed by 2016.
Is the maker of popular online games such as Empires & Allies and FarmVille ready to enter maturity? Pincus wants to earn investor respect by being more conservative with its spending.
But like Amazon.com Inc. (NASDAQ:AMZN), which is building for the future, Zynga’s expenses have never been the issue — at least not the way I evaluate the company. The issue is user monetization. How much money can Zynga make from each of its active monthly users? And can Zynga rake in the type of advertising dollars that has turned Facebook Inc (NASDAQ:FB) into a cash flow machine? That’s what Wall Street wants to know.
Until Pincus answers this question, ZNGA stock won’t go anywhere. And Zynga’s first-quarter earnings results released Wednesday didn’t effectively address any of these concerns.
Bottom Line
All told, this quarter continues the trend of what has been a dance of one step forward, two steps back for Zynga and ZNGA stock. While the layoffs may shore up the losses while stabilizing or even accelerating profits, that’s not enough to gamble on ZNGA stock today.
Add in the 11% year-over-year decline in daily active users (25 million versus 28 million), and Zynga needs to make investments — not cut costs — for ZNGA stock to work.
At the time of this writing, Richard Saintvilus held shares of AAPL.
