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Should You Place Your Bet on Zynga?

Tuesday - 4/23/2013, 2:45pm  ET

When Zynga first came out, it came out with many strong game titles, including Farmville, Cityville, Mafia Wars, and Words with Friends. The company priced its initial public offering at $10 per share -- at that time, the biggest tech IPO offering since Groupon. Zynga included 100 million shares at $10 per share, bringing its valuation to $1 billion. Zynga had a great pop on its IPO, but over the last few years it has dropped significantly for many reasons. The company now trades at $3.45 per share, but it seems to be holding well at that level. 

Game shutdown

Over the last few years Zynga has been struggling to make revenue. In 2012 the downtrend continued, and the company reported losses throughout most of 2012. In an effort to change things at the company, CEO Mark Pinkus laid out a plan to reduce costs.

The plan was to layoff at least 100 employees throughout the different game studios, and shut down 11 game titles. Some titles were pretty strong, and yet they were still shut down anyways.These games were: PetVille, Mafia Wars 2, Fishville, Vampire Wars, Treasure Isle, and Indiana Jones Adventure World. 

Zynga wants to cut ties

Zynga grew well on its end users, because it is part of the most played gaming platform on Facebook . Despite this phenomenon, Zynga has other plans. It wants to separate its ties with Facebook completely so that it is not dependent on Facebook for future revenue. In my opinion this will be a wise move by the CEO for shareholders. 

Zynga should relaunch itself so that it is not reliant on Facebook for revenue. Facebook has a good relationship with Zynga, since Facebook is receiving 15% of Zynga's profit. In my opinion Zynga should have left Facebook many years ago. Since it is tied to Facebook, Zynga had lost its opportunity to be its own stand alone platform. It was unable to set a fanbase of its own, and thus creating the problem the company endured over the last few years. 

One of the executives stated that the good part about starting to move away from Facebook, is that players will no longer be required to use their real names to log in. I think this current problem turns off many players as they don't want their real names shown online. So now Zynga offers a way for its users to create their own unique name, that allows them to be able to log into the game network. 

On Nov. 30 of 2012, Facebook had changed its deal with Zynga. Zynga was now just like every other game contractor with Facebook. I say this, because Zynga can no longer take users away from the Facebook platform. Zynga is still not completely broken away from Facebook, but the way things are going that all may change later on. In March of 2013 Zynga is also no longer required to post ads on its website from Facebook, or force users to use Facebook credits for their games. 

Still I think it will be better in the long run for Zynga to try and steer away from Facebook. Zynga is moving to mobile gaming, and I think it should define itself as a stand alone game maker like Glu Mobile . It will not only benefit the company, but also all future investors in the long run. 

Earnings surprise

Even though earnings throughout 2012 were not as investors had hoped, things started to  turn around in the fourth quarter. This was when Zynga reported earnings that beat analyst estimates. The company reported earnings per share of $.01,  and sales that topped $311 million. Analysts expected a loss of $.03 per share, and revenue of $212 million. 

GLU Mobile as competition

Glu is creating intense competition for Zynga. Glu is able to branch out more than Zynga can currently. This will hurt Zynga later in the long run, when the competition intensifies. The difference is that Glu is able to bring its games to multiple platforms. For example it has launched its popular titles on the Mac computer, and PC. I would say, Zynga should eventually branch out to launch its games under new platforms to stay competitive. 

People are spending plenty of time on mobile games. Glu has had no problems in the 4th quarter of 2012, when it reported earnings that beat analyst estimates. Glu reported that in the fourth quarter of 2012 it earned an EPS loss of $.05 per share, better than the analyst estimate loss of $.07 per share. Revenue for the quarter was slightly higher coming in at $21 million, versus the analyst estimate of $20 million. 

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