For the third quarter, Zynga (ZNGA) pulled off a decent performance. But it was not enough to gin up much excitement on Wall Street. After all, Zynga stock is up only about 3% in afternoon trading, while the return for the year sits 5% in the red.
We’ve seen big news in the mobile space this week, as Activision Blizzard (ATVI) shelled out about $5.9 billion for King Digital (KING), which is the maker of the hugely popular Candy Crush franchise.
Maybe there is an opportunity here with ZNGA stock? Or even a buyout possibility? Perhaps so.
Rundown on ZNGA Stock Earnings
But first, let’s take a look at the quarterly results for ZNGA: Revenues increased by 11% to $195.7 million and earnings broke even, up from a loss of $57.1 million in the same period a year ago. The Street, on the other hand, was looking for revenues of $186.5 million and a 1 cent per share loss.
Keep in mind that ZNGA has been aggressively focused on cost cutting, with an 18% reduction in the workforce. There have also been various initiatives to realize efficiencies, such as with outsourcing to third-party data centers.
But going forward, the top line could be challenged, which is likely to weigh on ZNGA stock. The bookings for the third-quarter were flat at $176 million. And as for the next quarter, they are expected to range from $165 million to $180 million. Yet the Street was looking for $191.8 million.
It certainly does not help that ZNGA is delaying two major games, which include Dawn of Titans and CSR2. Now they are expected to launch sometime in 2016. Although, according to the third-quarter earnings letter, Zynga CEO Mark Pincus noted that he is focused on quality and wants to make sure the games are highly engaging. Given the extreme competitive environment in the industry, this is definitely the right approach and should allow for potential long-term gains for ZNGA stock.
But in the meantime, the core user metrics remain downright awful. In the latest quarter, daily active players plunged by 21% to 19 million. There was also a 27% drop in MAUs to 75 million.
OK, but what about the possibility of a buyout — say to a larger player like Electronic Arts (EA)? Perhaps this is the ultimate outcome for ZNGA stock?
This very well could be true. But the recent deal between ATVI and KING should not provide too much comfort for investors. Consider that the deal was struck at a price-to-revenue multiple of 2.6. However, as for ZNGA stock, it is currently trading at about three times revenue.
Granted, Pincus is making the right moves in terms of cutting back on the costs and focusing on producing quality games. But such efforts will likely take some time to get traction.
In other words, it’s probably best to wait before taking a wager on ZNGA stock.
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.
