3 Reasons to Pull the Plug on Zynga Stock

Competitive threats make it less likely for ZNGA stock to address disappointing metrics

From the get-go, mobile-gaming specialist Zynga (NASDAQ:ZNGA) has at least some justification for its explosive ride this year. Over recent decades, video games have transitioned from a niche hobby into a multi-billion-dollar industry. Today, watching other people play video games is an actual, viable market. Such broad enthusiasm naturally bolsters the case for Zynga stock.

3 Reasons to Pull the Plug on Zynga Stock
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At the same time, though, critics openly wonder when enough is enough. On a year-to-date basis, ZNGA stock has skyrocketed over 37%. Not only that, shares didn’t really suffer the ignominy that sullied traditional gaming companies like Electronic Arts (NASDAQ:EA) or Activision Blizzard (NASDAQ:ATVI) in 2018. Last year, ZNGA basically broke even.

Like many other investors, I’m attracted to the gaming sector’s wide-ranging opportunities. Mobile games alone generated nearly $49 billion in 2017. According to industry experts, this entertainment platform will increase at a compound annual growth rate of almost 20% through 2026. But the question of course is whether this fact alone will drive Zynga stock higher.

You’d think it would. However, ZNGA stock has a history of volatile trading. Recent trades suggest that a fundamental turnaround is coming. On the other hand, Zynga has failed to live up to the hype surrounding its initial public offering.

Caught between taking a risk versus playing it safe, I’m choosing the latter. Here are three reasons why you should pocket your profits from Zynga stock:

ZNGA has Many Competitors

When Zynga first launched as an organization, it harnessed a rising tide. Even if some of its games didn’t resonate with audiences, it was one of the few mobile specialists in town.

Today, you can’t say that anymore. I’d even go so far as to say Zynga, and to some extent ZNGA stock, is an afterthought. Primarily, this is due to massive competition.

The mobile gaming space is getting crowded. The enormous popularity of free-to-play (FTP), multi-platform shooting game Fortnite dramatically altered the gaming landscape. Electronic Arts released Apex Legends, a Fortnite competitor, to rave reviews and downloads. Both of these are available on mobile and will draw some dollars away from more traditional mobile games.

Then there’s a refocused Glu Mobile (NASDAQ:GLUU), or Activision-Blizzard and their card game Hearthstone and their ownership of King. There are simply a lot of names trying their hand at mobile games these days.

Revenues Don’t Justify Zynga Stock

Whenever I see an investment shoot for the moon, I almost always stay away. The exception is if a good reason exists to buy into the enormous strength. Usually, this involves supportive fundamentals that justify the bullishness.

But with Zynga stock, I’m not getting a good read. Back in 2017, I can see through hindsight why investors bought into the mobile-gaming firm. Quarterly revenue growth on a year-over-year basis increased notably at that time, averaging over 16%. In 2016, sales growth averaged a loss of nearly 3%.

But last year, revenue growth for ZNGA stock slipped again, this time to 5.3%. This isn’t the kind of progress that I’m looking for in an organization. However, that’s not the main point. My argument is that I don’t want to pay a premium for Zynga when its growth trajectory is negative.

User Growth Disappoints for ZNGA stock

Mobile-game operators thrive on popularity and engagement. Since they’re not selling a console or physical apparatus, they must make their money elsewhere. Usually, this translates to app sales and advertising.

The former point is self-explanatory: you can’t win if no one is downloading your games. Here, advertising revenue helps to fill any fiscal gaps. However, most advertisers don’t like to broadcast to empty screens. If an organization like Zynga wants to stay relevant and solvent, they’ve got to bring in the numbers.

However, the company has failed to gain traction with audiences despite several years in the business. Back in the fourth quarter of 2012, Zynga had an average daily active user (DAU) count of 56 million. In Q4 of last year, average DAUs dropped to 22 million.

What’s even more startling is that this number hasn’t improved much since Q2 2015. During that quarter, DAUs averaged 21 million.

Ultimately, ZNGA stock is a risky proposition. Shares are rising, but revenue growth and DAUs aren’t following suit. Additionally, fierce competition will make Zynga less likely to address these vulnerabilities.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/04/3-reasons-pull-the-plug-zynga-stock/.

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