Zynga Looks Too Risky Ahead of Earnings

The gaming company is struggling with the shift to mobile

   

Zynga’s (NASDAQ:ZNGA) shares are up started off up more than 7%, as investors display confidence that the company will post a strong earnings report after the bell today. In fact, Zynga’s stock is up about 20% since early December.

While such optimism looks promising, hopping into the stock before the earnings report is risky.

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Analysts are calling for a loss of 3 cents per share and revenues of $212 million. During the same period last year, the company posted a profit of 5 cents a share on revenues of $307 million. While the Street’s consensus sure looks beatable, it also sheds light on some bigger-picture issues.

Zynga was at the forefront of the social gaming space, leveraging the Facebook (NASDAQ:FB) platform. Unfortunately, the market has slowed down as traffic has moved to mobile devices and Zynga has not been able to make a smooth transition.

Taking a look at AppData, you’ll notice that there has been continued deterioration in traffic for Zynga’s franchises. According to Sterne Agee analyst Arvind Bhatia, the quarter-over-quarter decline in mobile daily active users may be as high as 20%. This is certainly alarming and could mean Zynga’s stock may be vulnerable to a drop on the earnings’ news.

Of course, it could also just be short-term noise. Zynga is currently in the midst of a major restructuring. For example, the company is cutting 5% of its workforce and has shutdown under-performing games. Plus, the company is in strong financial shape. There’s about $1.35 billion in the bank and shares are trading at an enterprise-value-to-revenue ratio of a mere .64x.

More importantly, Zynga could get a nice boost from its efforts in real-money gambling. Already, the company has partnered with an operator in Europe and applied for a gaming license in Nevada. Keep in mind that the company’s Poker game remains highly popular.

However, this does not mean it is a good idea to buy the stock ahead of earnings. Over the past year, Zynga has had several plunges on earnings news. In late July, for example, the stock fell from $5.08 to $3.17!

While there will probably not be a repeat performance, the fact remains that Zynga is in the middle of a major transition and may still have some more bad news for shareholders. It’s probably best to wait for things to settle down before buying the stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook, 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” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/ipo-playbook/zynga-looks-too-risky-ahead-of-earnings/.

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