Zynga Inc Gets Bulls’ Attention, But Needs A Hit Game To Deliver

Zynga Inc Gets Bulls’ Attention, But Needs A Hit Game To Deliver

King’s upcoming IPO has brought comparisons with rival mobile gaming company Zynga Inc (NASDAQ:ZNGA), and the comparisons have in turn driven the stock of a company that seemed to have lost its edge. Zynga hit a 52-week high of $5.16, after spending most of 2013 below $4, but its fundamentals haven’t changed, and the company won’t be able to sustain recent growth without another successful title.

DAU, revenue per user continue to drop

Zynga Inc (NASDAQ:ZNGA)’s 4Q13 earnings impressed some analysts, Sterne Agee even raised its price target, but that just shows how far expectations have fallen. Daily active users have fallen from a high of 72 million a year and a half ago to just 27 million last quarter, a 3 million DAU sequential drop, but consensus had been around 24 DAU so some have chosen to see this as a stabilizing user base.

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Half of Zynga Inc (NASDAQ:ZNGA)’s revenues come from Farmville, Farmville 2, and Zynga Poker, all of which are mature and decelerating, and while constant cost-cutting and layoffs are necessary measures, (a recent 15% staff reduction must have left morale pretty low), both a falling user base and falling revenue per user mean that cost-cutting only delays the inevitable.

Some have argued that the downside is limited, and Zynga Inc (NASDAQ:ZNGA) still has enough cash on hand that it shouldn’t be any risk of bankruptcy even if it just idles along, but that’s doesn’t seem like enough reason to go long on the stock.

Zynga gambles on major change in direction

Zynga Inc (NASDAQ:ZNGA) seems to understand that it has to do something radically different if it’s going to recover. Producing apps similar to what is already out there and then crushing the competition on advertising can work, but it’s an unpredictable, low margin strategy.

That’s why the $527 million acquisition of NaturalMotions is so exciting. NaturalMotions, the developer behind hit game Clumsy Ninja, has a great graphics engine and artificial intelligence tools, and it’s not just interested in cloning existing games and smoothing off the rough edges.

“We don’t want to make games that other people are already making because we’d be competing for the same audience,” says NaturalMotion CEO Torsten Reil, reports Robert McMillan for Wired. “You can’t build an entertainment company like that. Entertainment companies should be about creative risk and creating something people have never seen before.”

Bringing in a lot of fresh talent, industry-leading development tools, and an ethos centered on making great games instead of selling decent games with great marketing is a big change for Zynga Inc (NASDAQ:ZNGA), but at least new Zynga CEO Don Mattrick realizes that the old business plan has played itself out.

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