Can Zynga Get Back in the Game?

Since reaching a high of $15.90 in March, Zynga (NASDAQ:ZNGA) has been on a death spiral.  Now the shares are trading at an embarrassing $2.40.

But I believe Wall Street may be overreacting a bit.

Just take a look at a recent report from JPMorgan (NYSE:JPM) analyst Doug Anmut.  According to his analysis, the value of Zynga’s real estate, cash and investments comes to about $2.46 a share. In other words, the Street is valuing the core business as worthless!

This seems preposterous. Zynga is expected to have  generated more than $300 million in revenues in the third quarter, set to be announced Oct. 24. While its titles are losing traction, there are still a variety of core franchises like Texas HoldEm Poker, Bubble Safari, FarmVille and Words With Friends.

True, Zynga has not had a breakout hit in a while. But then again, this is the nature of the finicky gaming business, as seen with operators like Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI). Let’s face it, Zynga will inevitably crank out some popular titles.

But what about the defections of high-level employees?  No doubt, this is definitely worrisome. The past week has seen the departures of the founders of Words with Friends, Paul and David Bettner, as well as the general manager of Zynga Poker, Laurence “Lo” Toney.

Yet Zynga really needs to cut back its headcount and bring in people with fresh ideas. Did you know that the company has more than 2,800 employees? It seems top-heavy, especially for a company that is experiencing stalling revenues.

Zynga is now focusing more on mobile gaming, which should be a large opportunity. To this end, the company has built its own gaming platform, which allows for hosting third-party titles.  This venture could lead to a nice pickup of revenues.

Zynga could also benefit from the growth in mobile gambling, which is a big business in Europe and  may be legalized in the U.S. For example, Glu Mobile (NASDAQ:GLUU) has announced a partnership with Probability PLC, a gambling operator based in the U.K. As for Zynga, it can leverage its highly popular gaming assets and perhaps form a partnership with a company like Las Vegas Sands (NYSE:LVS) or Wynn (NASDAQ:WYNN).

Of course, Zynga has much work to do, and it will likely take a few quarters to stabilize things. But the company still has a strong platform, a large base of revenues, compelling brands and an emerging gaming platform. And while it may not be worth its former lofty valuation, it seems reasonable to believe it is has some value.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.”  Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.