In the past, Zynga has suffered from its highly competitive industry, the change in consumer tastes, and Mark Pincus’ past management decisions. Other huge gaming companies like Electronic Arts (EA), DeNA Co. and Gameloft fiercely compete for the same customers, and in comparison, Zynga underperforms the most in net income (-$119.96 million), earnings per share (-.016), and five-year price/earnings-to-growth (-2.92). That underperformance has led to a nearly 50% decline in ZNGA stock over the past 52 weeks.
However, the real crippling blow to Zynga came with the consumer change from computer games to mobile games. The core of Zynga’s finances comes from games played on Facebook, but trends now show that people are looking to play on their smartphones with gaming apps. Although Zynga has created new titles like Words With Friends for mobile devices, the transition to the mobile platform has been bumpy amid a lack of creative ideas and the costs of the platform change-over. Also, the fact that the company arrived late into the cutthroat arena of mobile device gaming hasn’t helped matters.
To cut losses without a viable source of income in sight, Pincus recently laid off hundreds of Zynga’s employees in groups based on how much revenue their department brought to the table — a decision blasted critics and employees alike. A company survey showed only 53% approved of the way that Pincus managed the company, and employees cite that Zynga lacks not only new ideas but also the environment for them to flourish.
However, Zynga may yet be saved deus ex machina.
Microsoft’s (MSFT) Xbox head man, Don Mattrick, left the company to become the new CEO of Zynga. Mattrick joined Microsoft back in 2007, and his gaming vision and initiative have made Xbox the top-selling console in the United States. With Zynga, his new job will be kick-starting Zynga’s growth and finding fresh strategies to stay ahead of the fierce competition in the gaming industry.
Interestingly, Zynga’s old CEO personally recruited Mattrick, and instead of leaving the company completely, Pincus will remain Zynga’s chairman and chief product officer. Some analysts wonder how much change will actually be initiated as long as Pincus stays with the company, but others cite how Pincus said he is ready to let go of the company’s reins and allow someone who can do a better job to take the lead.
Also, in the future, Zynga has plans of its own to reinforce and expand its holdings in the real-money online poker franchise not just around the United States, but also in the U.K. and throughout Europe to explore a potential avenue for growth.
Just the news of this managerial change alone caused Zynga’s stock to jump by double digits on Monday, then ZNGA gained another 6%-plus Tuesday to close at $3.27.
Ever since the company’s high at $14.70 back in March of 2012, prices and growth have been significantly stunted until now. The recent stock activity is but another positive sign of Zynga’s comeback, and with an experienced gaming CEO who can bring new ideas, make efficient managerial decisions and take the company on a lucrative path to future success, Zynga should attract long-term investors who are willing to recognize and reap the benefits of Mattrick’s future potential as the company’s new leader.
I want to get long ZNGA because it has so much upside potential, but I always want to define my risk vs. reward.
Buying the ZNGA Jan 2014 4-4.5 Bull Call Spread for 11 cents debit.
- Risk: $11 per 1 lot
- Reward: $39 per 1 lot
- Breakeven: $4.11
- Reward-to-Risk Setup: Almost 4-to-1
Greeks of this trade:
- Delta: Long
- Gamma: Long
- Theta: Short
- Vega: Long
As of this writing, Andrew Keene did not hold a position in any of the aforementioned securities.