When Zynga (NASDAQ:ZNGA) came public in mid-December, the performance was awful. The stock was priced at $10 and quickly plunged to $8. But then it started to gain momentum, and its price is now $13.32.
One of the catalysts was the Facebook filing, which caused lots of excitement with investors. No wonder: Zynga accounts for 12% of the social network’s revenues.
But something else was happening: buzz about Zynga moving into the virtual gambling business (it looks like states will begin to legalize it).
Great, huh? But it’s not without challenges. First of all, Facebook has shown some signs of slowing. Also in regard to online gambling, this is likely to take a while to play out. It will probably also involve a complex partnership with a traditional casino operator like MGM (NYSE:MGM), Wynn Resorts (NASDAQ:WYNN) or Las Vegas Sands (NYSE:LVS).
Instead, Zynga needs a way to create more and more cool game titles. Unfortunately, this has been a struggle lately. Consider that there have even been reports that Zynga has been knocking off the games from rivals.
What to do? Well, one approach is to partner with major entertainment companies to create exciting games. Actually, this may be the thinking behind Zynga’s recent arrangement with Hasbro (NYSE:HAS). It’s true that the current deal only calls for merchandising, which is probably a relatively small opportunity. It seems only a few titles — say Farmville, FrontierVille and Castleville — would make for popular dolls and action figures.
Rather, the deal with Hasbro may have broader implications: Zynga could be ready to use Hasbro’s iconic brands in its own games. Hasbro has many of them, such as Pictionary, Risk, Scrabble, Dungeons & Dragons, Trivial Pursuit and Candy Land.
As Zynga grows larger, it’s inevitably getting tougher to innovate. This happened with other game operators like EA (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI). So, to remain competitive, these companies have also had to team up with other brands to find growth. Classic examples include Madden NFL and Harry Potter.
The good news is that Zynga is in a strong position to pursue this strategy. After all, it raised a cool $1 billion from its IPO.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.