Jefferies Group, Inc. (NYSE:JEF) has released a very interesting report that looks into the social gaming bigwig Zynga Inc (NASDAQ:ZNGA)’s upsides and downsides during the coming months. There is no doubt about Zynga’s sway in the casual gaming platform, where it boasts a whopping 300 million active users, however the report notes that only 4 million of these users actually pay for playing. Jeffries estimates that users will spend $7 – 8 billion on Facebook Inc (NASDAQ:FB) and iOS games in 2012.

Zynga logo

The Tailwinds

Zynga could benefit from the improved FarmVille 2 release, and this could help in gaining profits from Facebook Inc (NASDAQ:FB). Zynga is also big-stepping into advertising. This will help in offsetting the impact of non-paying users on the company’s earnings. Advertising increased by +170% and generated $41 million in 2Q 2012. Zynga is also making a major transition  to the mobile and tablet platform, if it is successful in this venture, the mobile market could generate huge returns.

Zynga Inc (NASDAQ:ZNGA) is launching its own Zynga.com that could avoid the 30 percent royalty tax that it has to pay on Facebook Inc (NASDAQ:FB) and Apple iOS platforms. Jefferies models capital expenditure for this infrastructure at 12% of revenue. If the real money poker is sanctioned in the US, Zynga which is number one in the fake money poker game, could drive huge benefits from the decision.

The Headwinds

The mobile gaming is densely populated with providers, although the transition to the iOS and Android environment is a bold step, the fact remains that the competition is huge in the mobile zone. The Apple app store has over 125K games, while the competition on Facebook Inc (NASDAQ:FB), Zynga’s major driver, revolves around just a few thousand games. Zynga’s DrawSomething game is consistently losing users and the company has not been successful in releasing any hits lately.

Confidence in Zynga’s management is progressively weakening as several key emloyees resigned in the last two quarters. Zynga Inc (NASDAQ:ZNGA) also has a track record of copying popular games and that neither sits well with its reputation nor with earnings. Zynga is currently embroiled in a lawsuit with Electronic Arts (EA), which claims that Zynga’s top grossing game “The Ville” is ripped from EA’s Sims Social. Zynga is also being sued by investors who accuse the company of shady trading and mismanagement.

EA VS ZYNGA

The key catalyst that has driven performance through the first half of 2012 were The Ville , ChefVille, and FarmVille 2. Data shows that users have increased, but the big games of Zynga are losing popularity. Performance through upcoming months will depend on how the EA vs Zynga lawsuit plays out.