Zynga stock has long been a disappointment for investors and had even plunged to penny stock levels. But for Q1, the game maker’s revenue topped analysts’ estimates, and earnings broke even on an adjusted basis versus the forecast for a loss of 1 cent per share, pushing the stock up by over 10%. Now a big question is whether this earnings beat was a one-time deal or a turning point in the company’s fundamental direction. The answer is that Zynga is far from over.
A big and positive transition
One of the biggest concerns has been the declining popularity of Zynga games. Previously, the game maker heavily relied on Facebook to make its games popular. But as its games lost steam on Facebook – the world’s biggest social network — its stock also became obsolete.
This time though, the game maker revealed that it no longer depends on Facebook, and now, Apple is its biggest platform partner. This is big and surely a positive change for the game maker. Another big win was that now 76% of its overall bookings came from mobile, and its mobile audience rose 7% from Q4. This again is a very big win for the game maker as only a few years ago its games were only played on desktops.
What is the new CEO planning?
Frank Gibeau, who took over as CEO from founder Mark Pincus a couple of months ago, could prove to be a big asset for the game maker. Gibeau has tons of experience backing him as previously he worked for Electronic Arts’ mobile division.
The CEO has taken his time to analyze the company’s position and is now working to turn it around. He surely has a definite plan to do so. The first thing the CEO is focusing on is utilizing the abundant operating leverage the game maker has.
“I’ve been surprised at how much operating leverage is available to us here,” Gibeau said in a recent interview. “We can get a lot more from the resources, talent, and ideas that we have around the company than we currently do. We need to get ideas off the whiteboard and into code.”
Gibeau believes Zynga has many talented teams and is in the right segment, but the problem is “a great deployment.”
Zynga needs to be more aggressive with games
Another aspect Gibeau will be working on is rolling out more new games. Gibeau admitted that the company has not been very aggressive in developing new titles.
Some of Zynga’s games are doing well (though not exceedingly well). Its Social Slots portfolio was up 77% year-over-year and 13% sequentially. Four of its slot games were among the top 30 highest-grossing apps in the casino category in the App Store (iOS). Some of its older games like Zynga Poker (running since 2007) are performing well (bookings up 13% yoy). And let’s not forget Words With Friends, which recorded its strongest Q1 bookings ever.
Wedbush Securities analyst Michael Pachter is also confident on the new CEO and Zynga, saying Gibeau has a “history of getting games shipped on time and in a predictable manner…We are more confident that Zynga can hit its ten-game target for 2016, and we expect the pace of releases to pick up and become more consistent in future years.”
Bottom line
With a robust Q1, Zynga now should be on your radar. The company’s valuation is low – even less than its HQ – but it is doing all the right things. With the proper deployment, it is just a matter of time before it bounces back and regains its title.
