Zynga Inc (NASDAQ:ZNGA) has been one of the casualties of the shift from social gaming on sites like Facebook Inc (NASDAQ:FB) to mobile gaming on apps, and investors have mostly cooled on the stock even though it has managed to cut costs and essentially broke even last quarter ($68,000 in the hole in 3Q13 compared to a $53 million loss in 3Q12). But Blackstone Equity Research has recently argued on SeekingAlpha that the company could be a good short term bet.

Zynga Earnings

“Zynga (ZNGA) operates in an industry where the competition is quite intense and its users have a short interest period,” they write. “The company is mostly dependent on its top three games that include Farmville 1, Farmville 2 and Zynga Poker that collectively generate more than 50% of the company’s revenues. These games are around two to three years old and can easily be replaced.”

Small improvements could return Zynga to profitability

The combination of sector headwinds (the shift to mobile gaming) and the precarious nature of Zynga Inc (NASDAQ:ZNGA)’s revenues should be enough to give investors pause, but Blackstone Equity thinks the company’s new management has made a lot more progress than people realize to restoring profitability. If Zynga Inc (NASDAQ:ZNGA) can either increase its daily average users (DAU) from 36.5 million to 37.4 million or increase revenue per DAU from $24.05 to $25.36 (or some combination of the two), then all else being equal the company breaks even, and any further improvement is profit.

The problem of course, is that the number of users is falling no matter what metric you look at (DAU, monthly active users, monthly unique users). Another scenario is that Zynga Inc (NASDAQ:ZNGA) needs to increase revenue per DAU by $1.31 plus whatever it takes to make up for its falling user base, but revenues from its top games are also falling.

Zynga active users Zynga

 

Zynga needs another hit game to bounce back

The other option is for Zynga Inc (NASDAQ:ZNGA) to build a presence in the mobile gaming sector, but this is easier said than done. As much work as the management team has done cutting costs and streamlining operations, it needs a new hit game to restore its position in an increasingly competitive sector. Blackstone Equity is bullish on Zynga Inc (NASDAQ:ZNGA) over the next few quarters, but the overall picture is of a company fighting the tide.