On Thursday, Zynga (ZNGA) will release its third quarter report after the market closes. And yes, there is tremendous pessimism. For the year so far, Zynga stock is off by about 36% — not helped by today’s 5% drop ahead of Zynga earnings.
Could Q3 mean a turn to better fortunes for investors, or is ZNGA stock still best avoided?
The bar has been set fairly low for Zynga earnings. The consensus estimate is for revenues of $171.67 million and a net loss of 1 cent per share. During Q3 in 2013, the revenues were $202 million and the bottom line barely broke even.
Investors have already been anticipating more bad times for Zynga stock. Since mid-September, the stock has lost about 19% of its value. The short interest is almost 9% of the float. Keep in mind that short sellers are investors who make money when the value of the stock falls.
Oh, and Wall Street analysts are certainly dour. Six have “hold” ratings on Zynga stock and three have “sell” recommendations.
So could anything get worse? Well, it looks like Zynga stock has felt the pressure from the overall slide in social stocks, as seen with Pandora (P), Twitter (TWTR), Yelp (YELP) and even Facebook (FB). Simply put, it is getting tougher to post strong growth and the costs of hiring engineers is also taking a toll on earnings.
All in all, the outlook seem very grim for Zynga stock.
Chance to Profit With Zynga Stock
But then again, such times can be good for traders to make a quick buck. Merely meeting expectations may be enough to increase the Zynga stock price! If that happens, there be an additional boost from a short squeeze. Squeezes happen when short sellers are forced to buy back shares to cover their positions, sending the stock much higher.
ZNGA stands to benefit from its restructuring efforts, as well. Over the past year, the company has cut its workforce, shut down studios and nixed underperforming titles. Those moves won’t catapult Zynga forward, but they’re necessary first steps for getting back on track.
Besides, ZNGA CEO Don Mattrick has a tremendous track record. Prior to joining the company, he pulled off the turnaround of Microsoft’s (MSFT) Xbox franchise and was also an executive at EA (EA), where he launched franchises likes Need for Speed
, Harry Potter and The Sims.
So at ZNGA, Mattrick has been pushing aggressively on building a pipeline of quality games. Some of the interesting ones include NFL Showdown and Looney Tunes. There are also new versions of Zynga Poker and Words With Friends.
Hey, all it takes is one hit to gin up excitement and pump up revenues, right?
Granted, ZNGA still faces lots of challenges and the competitive environment is intense, with rivals like King Media (KING), Gree, Supercell and Glu Mobile (GLUU). But ZNGA has a strong CEO, more than $750 million in cash and a robust pipeline of games. And with sentiment at extreme levels, this looks like a good entry point for the stock if the company’s turnaround efforts start to gain traction.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
