Avoid Zynga’s Free Fall

by Tom Taulli | July 26, 2013 1:16 pm

Zynga’s (ZNGA[1]) new CEO Don Mattrick has his work cut out for him.

The company is in a nose dive — and so is the stock price. In today’s trading, the shares are off 18% to $2.87. Keep in mind that the company came public in late 2011 at $10, raising a cool $1 billion.

In the quarter announced Thursday, revenues plunged by 31% to $231 million and bookings were off by 38% to $188 million. There was also a loss of $15.8 million, or 2 cents a share. Yet things would have been even worse if Zynga did not slash the workforce by 18% last month.

But perhaps the most ominous metric: The daily active users (DAUs) dropped by a grueling 45% to 39 million (on a year-over-year basis), which is 9 million worse than what Wall Street was forecasting.

Then again, Zynga has not produced a breakout game in a long while. Consider that it is no longer the top operator on the Facebook (FB[2]) platform (the leader is now King.com, which is the maker of the wildly popular Candy Crush Saga).

At the same time, Zynga’s current franchise titles have continued to deteriorate and the transition to mobile has been awful. Since the beginning of this year, the number of monthly mobile users dropped by 20% to 57 million.

Oh, and don’t expect real-money gaming to save the company either. Zynga has dropped its efforts to get a gaming license in the U.S. This despite the fact that the company’s co-founder and former CEO, Mark Pincus, routinely trumpeted this opportunity while on prior conference calls.

It all seems kind of hopeless, right?

But there are still a couple silver linings. First of all, Zynga has $1.1 billion in the bank.

Next, Mattrick is a legend in the gaming business. He started his first gaming company at 17 and then sold it to Electronic Arts (EA[3]), where he became an executive. During his tenure, he went on to build breakout hits like FIFA, Need for Speed, Harry Potter and The Sims. Then he moved over to Microsoft’s (MSFT[4]) Xbox in 2007, where he turned around the business and made it profitable.

As for Zynga, Mattrick still needs time to evaluate the situation, but it seems like a good bet he will initiate another big layoff (the base is currently 2,360). Such a move will help stabilize the business and bring back profits and cash flows. Besides, in the mobile world, game development often involves smaller teams.

In the meantime, Mattrick will need to find ways to get Zynga’s creative spark back. Unfortunately, it won’t be easy, especially given the intensely competitive environment.

And that’s why Mattrick is hedging on the timeline for success. According to the conference call, he said there will likely be volatility in the next two to four quarters.

In other words, it means more waiting for investors, who have already lost patience.

Tom Taulli runs the InvestorPlace blog IPO Playbook[5]. He is also the author of High-Profit IPO Strategies[6]All About Commodities[7] and All About Short Selling[8]. Follow him on Twitter at @ttaulli[9]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA
  2. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  3. EA: http://studio-5.financialcontent.com/investplace/quote?Symbol=EA
  4. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  5. IPO Playbook: https://investorplace.com/ipo-playbook/
  6. High-Profit IPO Strategies: http://goo.gl/TXQsz
  7. All About Commodities: http://goo.gl/FfP8R
  8. All About Short Selling: http://goo.gl/t5Jzb
  9. @ttaulli: https://twitter.com/ttaulli

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