Zynga Inc (NASDAQ:ZNGA) continues to lose popularity on Facebook Inc (NASDAQ:FB) which makes its price risk/reward profile balancing negative. However, the negative profile is partly compensated by medium term performance drivers such as mobile acceleration, operating cost reductions, and next generation web/mobile development, according to Mike Hickey from Benchmark.


Losing on Facebook, limited success on mobile platforms

Around 70 percent of Zynga Inc (NASDAQ:ZNGA)’s booking was contributed by Facebook Inc (NASDAQ:FB)’s platform in the second quarter of 2013, which according to the analyst is trending downwards. Hickey expects the rating to drop significantly for both MAU and DAU for the Facebook platform, “execution risk offset somewhat by bookings guidance that calls for a 27% sequential decline to the midpoint.”

Additionally, the social game maker could not perform well on mobile games and the games were standing low on the mobile ranking charts. Hickey expects Zynga Inc (NASDAQ:ZNGA) to have low franchise value from the company’s significant IPs excluding Farmville, and IPs like Castleville are expected to underperform.

Job cuts to affect future growth

Investors are expecting that Zynga Inc (NASDAQ:ZNGA) will cut jobs aggressively if booking becomes stable, following competitor King’s model. According to Hickey, “which seems probable but potentially not as aggressive or fast enough to support the recent run in valuation.” However, Hickey feels that an aggressive lay off will not be good for the future as Zynga is struggling to gain traction on Facebook and the company’s mobile games lack a “blockbuster product” to carry the growth momentum, therefore its necessary to increase mobile head counts where there is a shortage of technical and creative expertise.

Recent remarks from former CEO Mark Pincus who is now head of product, chairman and controlling shareholder that he is now bored with games is also discouraging. Zynga Inc (NASDAQ:ZNGA) has not revealed any transformational product that is in the pipeline or any product from competitors that it can adapt to it on the network, which is also discouraging. Hickey questions the ability of new CEO Don Mattrick to revive the “deeply sickened business.”

Zynga 3Q estimates

For the third quarter, bookings are expected to be around $145.7 million, which is a decrease by 43 percent against corresponding quarter of 2012 and decline of 22 percent from the second quarter of 2013. Non-GAAP net loss is expected to be around $37.9 million for the third quarter, which is a drop of $0.4 million from the same period last year, and non-GAAP net loss of $6.1 million in the second quarter of 2013.

Benchmark placed a Hold rating on Zynga Inc (NASDAQ:ZNGA) with a price target of $2.98.