Zynga Inc (NASDAQ:ZNGA) stock rose by more than 12% in early trading today as investors priced in the effects of online gambling legalization. The company is rumored to be poised to take a leading position in the online gambling market, when, or if, it comes into being in the United States. Are investors acting too fast on the gambling opportunity?
Whenever the market finds itself a narrative, such as “Zynga earnings will boom when it enters the online gambling market,” it’s right most of the time, but not always. It’s important to look at the other side of the argument to see the weak points. Zynga Inc (NASDAQ:ZNGA) has many of them.
Zynga has not been a reliable stock. The firm’s shares price has risen by more than 50% since the start of 2013, but is still down by more than 75% since they peaked on March 2nd 2012. The company has not delivered a solid earnings report since 2011 because its splurged money on bad acquisitions, and its newer games proved less popular, and less profitable than investors hoped.
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In the last year the firm earned 7 cents per share. 2013 is expected, according to analyst consensus, to bring in a loss of 5 cents per share. The company is expected to break even again in 2014. Can Zynga Inc (NASDAQ:ZNGA) really be expected to handle online poker properly, and if it does, can it be expected to be a leader in the market?
The poker business does solve one of Zynga’s problems. The game has been consistently popular, and people love to play it with their friends. All the company has to do is make it easy for players to log in, add money, and play against their friends and strangers. This is where the company’s expertise lies. It is reasonable to assume Zynga will make a decent job of it.
Competition appears to be the biggest problem for Zynga Inc (NASDAQ:ZNGA) going forward, and the biggest problem with the “legal gambling equals earnings” thesis. Zynga has the largest online poker platform, with around 40 million users. But it has no experience in real money gambling, and there are many companies out there who do.
Already established international online casinos like PokerStars, 888Poker, Titan Poker, and Party Poker, have been in the game for years. They have the experience that Zynga Inc (NASDAQ:ZNGA) does not. Online gambling may save Zynga, but casino operators don’t have it as easy as people seem to think. The social gaming giant isn’t anything like a sure bet.