Morgan Stanley (NYSE:MS) has downgraded Zynga Inc (NASDAQ:ZNGA) to underweight owing to challenges in mobile gaming.

Zynga logo

Competitors Outperforming

According to AppData, competitors have outperformed Zynga Inc (NASDAQ:ZNGA) and its popular games, and gained popularity on Facebook Inc (NASDAQ:FB). Zynga is trying to gain traction in mobile gaming, where there are fewer barriers to entry.

Zynga Inc (NASDAQ:ZNGA)’s latest games like Draw Something 2, Running with Friends, Solstice Arena and Battlestone are better performing games. However, only one game, Running with Friends, has gained some real popularity so far.

Real Money Gaming a Big Opportunity for Zynga

Zynga Inc (NASDAQ:ZNGA) can achieve success by gaining a dominating position in Real Money Gaming as Morgan Stanley (NYSE:MS) mentioned in its 2012 MS Blue Paper, Social Gambling: Click Here to Play. The benefit of real money gaming for Zynga won’t be seen until 2014/2015, however, because at the moment it only has permission to operate in one country.

Not the Leader, But Impressive User Base

As per the report from Morgan Stanley (NYSE:MS), Zynga Inc (NASDAQ:ZNGA) is not the leader in social gaming anymore, but it still has an impressive user base with 52MM daily active users and 253MM monthly active users. The web revenue, primarily from games on Facebook Inc (NASDAQ:FB), has declined although not completely stopped. However, competitors are dominating Zynga on web games. Mobile gaming has become the latest trend and Zynga is developing games for mobile; however, revenues generated from this medium are not enough yet to counterbalance declining revenue from web games.

More Layoffs Expected at Zynga

Despite a recent cut in Zynga’s workforce, the report believes that the game maker will further reduce the headcount Zynga Inc (NASDAQ:ZNGA) has a huge number of employees, who exert downward pressure on the EBITDA margins according to the report.

Value Drivers

The key value drivers mentioned in the report are as follows-

  • Games are becoming popular, which is evident from the increasing monthly users.
  • The daily active users have also increased, new social gamers are coming on, and existing players are taking more interest.
  • Conversion of “freemium” users via in-game purchases, measured by avg. daily bookings per user (ABPU).

Potential Risk For Zynga

According to the report, Zynga Inc (NASDAQ:ZNGA) has risk due to too much dependence on Facebook Inc (NASDAQ:FB). Another potential risk is that Zynga games are usually short lived, and their popularity may begin to decline. New entrants are the most potential threat to the company at present. The base games of Zynga like Farmville and Poker are also losing their popularity due to immense competition on the Web.