Zynga Inc (NASDAQ:ZNGA)’s performance will continue to deteriorate over the long term, says The Benchmark Co. analyst Mike Hickey, though the company may see a medium term upside due to management reset, strategic rebalancing, headcount reductions and mobile growth opportunity. Zynga has been successful in holding on to its cash despite rapid decline in bookings. That gives a perception that the company management is taking a thoughtful approach to resetting its strategy.
Zynga story is over
But the reality is that, says Hickey, Zynga Inc (NASDAQ:ZNGA)’s financial condition will continue to deteriorate. The San Francisco-based company’s game portfolio metrics are wiped by competitors while the company continues to figure out a turnaround plan. And the social gaming company’s Q4 guidance, which missed the Wall Street consensus, confirmed this fact. Zynga is scheduled to report its Q4 earnings on February 6 after the bell. The company’s daily active users (DAU) and monthly active users (MAU) have shown startling weakness, and they would affect the company’s performance going forward.
The Benchmark Co. said investors are expecting an aggressive headcount reduction and stabilization in bookings. That’s possible but not aggressive enough to fill the gap caused by bookings deterioration and the recent run in valuations. And an aggressive layoff may prove problematic in the short term. Zynga Inc (NASDAQ:ZNGA) has to protect its Facebook business. Its mobile business still lacks a blockbuster product to support future growth. That requires Zynga to increase the headcount in genres or businesses where it lacks creative/technical expertise.
Has Zynga lost its competitive edge in mobile?
Mike Hickey suspects that Zynga Inc (NASDAQ:ZNGA) might have lost its competitive edge in the mobile gaming market, as its competitors are creating games that have long-term user engagement. The Benchmark Co. believes that Zynga’s core IP has limited franchise value over the long term as the current mobile experiences are easily replicable. The rapidly evolving mobile gaming landscape can easily make a game irrelevant.
Hickey isn’t optimistic about Zynga Poker‘s growth opportunity after the recent decline in its performance. Supercell’s Hay Day is ruling the mobile gaming market. Zynga Inc. (NASDAQ:ZNGA) may release Farmville 2 on mobile, which is likely to taste mild success. But if the company fails to executive perfectly on this game, Zynga will create a gaping hole in the core foundation of its turnaround strategy. Hickey said Words With Friends has little monetizing value outside advertising.
Zynga Inc (NASDAQ:ZNGA) shares were up 0.88% n pre-market trading Wednesday to $3.42. The Benchmark Co. has a Hold rating on the stock with $3.38 price target.