For millions of gamers, Zynga Inc (NASDAQ:ZNGA) is a digital fun factory that has provided endless hours of distraction and amusement, with such titles as “Farmville,” “CityVille,” “Zynga Poker” and “Wizard of Oz Slots.” For a long time, however, the ZNGA stock has been as clunky as a DOS screensaver—and this summer has been rough for the company, from both a creative and financial perspective. And yet, Zynga stock continues to maintain a great degree of respect as the company works to fix its problems.
More Upside for ZNGA Stock?
Not unlike many tech companies, Zynga Inc first attracted attention by being in the right place at the right time with the right products—in its case, on the up-and-coming social media site Facebook Inc (NASDAQ:FB) in the summer of 2007, with its “Texas HoldEm Poker” game (now Zynga Poker). As Facebook became a more ubiquitous presence in daily life, Zynga’s games found larger audiences, most notably the addictive “Farmville” game.
Buoyed by its early success, the company went public in December 2011, with ZNGA shares trading at $11.00 on its opening day. Not unlike the experiences of many tech companies, ZNGA stock started at the top and worked its way down; ZNGA stock began this week trading at $2.66.
For those who believe that Zynga stock has lost its zing, the company’s recent second-quarter earnings report affirmed that apprehension: $182.0 million in revenue, down three percent from the first quarter and down nine percent from the second quarter of 2015, while the $136.0 million in online game revenue had a one percent dip from the previous quarter and a 16% plunge from a year earlier.
And while its net income loss was not as drastic as in earlier earnings reports—$4.0 million for the second quarter, compared to $27.0 million in both the first quarter and the second quarter of 2015—it was hardly cause for celebration. Not helping matters was Zynga’s third-quarter projections: revenue was forecast in the range of $170.0 million to $180.0 million, with a net loss between $29.0 million and $33.0 million.
Adding insult to injury, Zynga Inc reported 61 million average monthly users during the second quarter, down 11% from the first quarter and down 26% from a year earlier, with many defections arising among mobile users. One can easily imagine that there will be even greater defections for the third quarter, thanks in large part to the hypnotic charm of rival Niantic, Inc.’s “Pokémon Go.” (Source: “Zynga User Base Shrinks Further, Loss Narrows on Accounting Change,” The Wall Street Journal, August 4, 2016.)
Zynga CEO Frank Gibeau used his second-quarter earnings call to glumly declare that the company needed to do “more with less,” and he added a surprise announcement by pulling the plug on an anticipated mobile version of CityVille, claiming that “the game failed to meet our expectations and those of our players” following preliminary tests. (Source: “Zynga Stops Development on CityVille Mobile,” Gamezebo, August 5, 2016.)
But beyond the digital real estate of CityVille, Zynga had its own real estate headaches due to news of its failure to sell its San Francisco headquarters—which it purchased in 2012 for a hefty $225.0 million—resulting in a three percent drop in ZNGA stock. (Source: “Zynga Stock: Is It Time to Bet on Zynga Inc?,” Profit Confidential, July 26.)
Zynga Stock Remains Stable
Nonetheless, Zynga is managing to carry on. It has recently offered a slate of new games, including “Spin It Rich!,” “Ice Age: Arctic Blast,” “Wizard of Oz: Magic Match” and its long-delayed mobile racing game “CSR Racing 2.” And while none of these may have captured the public’s imagination with the intensity that accompanied Pokémon Go (but, then again, what can?), it showed that the company’s creative juices have yet to dry out. “We still have got a lot a work to do,” said Gibeau in a Reuters interview. “We are not declaring victory or getting too ahead of ourselves here.” (Source: “Zynga Is Still Being Fueled By ‘Words With Friends’,” Fortune, August 4, 2016.)
Zynga is also reinventing its seven-year-old “Words With Friends” game in an educational edition aimed at schoolchildren between the ages of eight and 12. The new “Words With Friends EDU” was recently unveiled as a free download for Web-based and mobile users. (Source: “Zynga Remakes Words With Friends for Classrooms,” The Star, July 29, 2016.)
The investment community appears to have high hopes for Zynga. As of August 23, ZNGA was up 3.5% over the last three months, up 33% over the last six months, and up 9% over the last year. (Source: “Zynga Inc (NASDAQ:ZNGA) Stock Technicals Hit Weakness,” CMLVIZ News, August 23, 2016.)
Following its second-quarter earnings report, Cowen and Company raised shares of Zynga from a “Market Perform” rating to an “Outperform” rating and set a $3.50 price objective for the company. Prior to the earnings report, TheStreet raised shares of Zynga from a “Sell” rating to a “Hold” rating, and Jefferies Group reissued a “Buy” rating on ZNGA shares. In May, Wedbush reissued an “Outperform” rating and issued a $4.25 price objective while Benchmark Company raised its price objective on shares of Zynga from $3.18 to $3.22 and gave the stock a “Buy” rating. (Source: “Zynga Inc. (ZNGA) Updates Q3 Earnings Guidance,” The Cerbat Gem, August 7, 2016.)
The Takeaway Regarding ZNGA Stock
To be flippant, Zynga would benefit dramatically from a new game that would duplicate the enthusiasm generated when Farmville and its other beloved titles first hit the scene. But none of its recent releases appear to be creating that groundswell of excitement. Coupled with the desultory third-quarter projections and the embarrassment over its inability to sell its pricey headquarters, one could assume that ZNGA is in danger of flatlining.
And, yet, ZNGA stock is going strong, and the investment community is clearly rooting for its success. Whether the company will aggressively follow through with its foray into the educational market remains to be seen, but that arena would certainly help to hook a new generation of Zynga gamers at a formative age. To his credit, Gibeau acknowledges that the company can do much better, and there is no reason to doubt his resolve in pushing forward.
For those with a penchant for optimism, a soft spot for corporate comebacks and an unabated mania for Farmville, Zynga stock is deserving of attention and respect. But for the wait-and-see crowd, it might be prudent to hold off until after Zynga’s third-quarter earnings report to determine if ZNGA is the winner that many people want it to be.