The stocks of Zynga Inc (NASDAQ:ZNGA) took an up shot, backed by the news of online gambling (RMG) which will benefit the company in the long run. According to a report from Cannacord, the core metrics will continue to be mixed, but will remain stable for the most of 2012. For the first quarter, the estimates of the report are in line with the actual performance.  The target price of $4 is unchanged, and is based on 1.4 xs. The revenue is estimated at $1.2 billion.

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Real Money Gambling – A Mammoth Opportunity

TRreal money gambling can be a substantial opportunity for Zynga Inc (NASDAQ:ZNGA). Poker can be a beneficial game for Zynga and other game types can change the company into a bigger entity. However, Zynga will have to go through many legal obstacles as well as fierce competition. Real money gambling might bear great results, and can start working in favour of Zynga in the long run. This also reflects in Zynga’s statement that it is not expecting a substantial contribution in revenue from RMG in 2013. The recent developments in the gambling field, which are also positive for the company, are:

Zynga Poker User Base Chart

Nevada was the first US state to sanction and legalize online real money gambling in February last year. According to the bill, Nevada can enter into agreements with other states to offer internet poker and various other online gambling games. This bill, which Nevada sanctioned in 2011, covers all forms of gambling and introduces state to state building as well.

Five days later, Nevada legalized online gambling; New Jersey Governor Chris Christie gave a sanction to a bill providing legal status to Internet Gambling in the state. There is a provision in the New Jersey bill that allows the player not to be physically present in the state as long as it is consistent with the federal law or the law of jurisdiction including any foreign nation.

Another State, Delaware, passed an internet gaming bill, under which people can play internet lottery games, but they should be within the state. By now Delaware has approved online gambling in all forms.

There are talks going around that Massachusetts is also considering legalizing online gambling in the state.

The process is time consuming as in Nevada alone it will take 12-18 months for Zynga Inc (NASDAQ:ZNGA) to overcome the regulatory hurdles, and will require very thorough investigation in Zynga people and systems.

Potential revenue, Zynga Poker (left) & all gambling (right) Chart

The opportunity for Zynga in the online gambling field can be viewed from two perspectives. If only Poker is taken into consideration, Zynga will make a substantial effort to transform around 6 million Poker DAUs to real money and by doing this Zynga can create a $100 million plus business in a couple of years. There is a possibility that the player base of Zynga plays other games like slots, bingo, etc. this could help Zynga to build 2 to 3 times the size of its current freemium business.

Updates

So far, Zynga Inc (NASDAQ:ZNGA) has not launched any new game and is getting lukewarm responses from its core games. Games of Zynga, such as Poker, Words with Friends, and Draw Something, gained some momentum and were up in low single digits. The other games of Zynga, Farmville, CastleVille, Bubble Safari, and ChefVille faced double digit declines in the number of DAUs.

Performance of Important Games in Q1 QTD vs. Q4 Chart

Zynga’s mobile games have stabilized slightly and showing some improvement. The improvement is mainly contributed by the improved ranking of Ayakashi: Ghost Guild on iPhone. The game reached the ranking of 79 after falling below the top 500.

If Zynga wants its games to play increase revenue, it requires a large number of people who still believe online gaming is an attractive way of entertainment.  Facebook Inc (NASDAQ:FB) at present is the top contributor of Zynga’s revenue. It draws over 90 percent of its revenue from Facebook. Zynga is, however, making efforts to diversify from Facebook. Zynga contributes 12 percent of Facebook revenues..

Zynga has levelled up its expenditure in marketing and promoting its games to potential users online. There are chances that growth in key metrics of Zynga is due to increased spending and it can decline with lowering these expenditures. This indicates a business where operating leverage is less than expected and lower profits can be expected.

AAs of now, Zynga Inc (NASDAQ:ZNGA) is growing, mainly by hiring more employees and improving the complexity of its operations. The company should sale smoothly during this growth period, but if it fails, the report believes the company “will face multitude of negative outcomes including unproductive hiring, service outages, and customer service issues.”