Zynga Inc (ZNGA) Down 20% Pre-Market, is it a Value Play Now?

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Zynga Inc (NASDAQ:ZNGA) negatively pre-announced 3Q12 results and lowered its FY12 guidance due primarily to weakness in its desktop catalog titles, lower-than-expected results for some new titles, and expected delays in launching pipeline titles. The company is also taking an $85-95mn impairment charge related to ‘OMGPOP’ (not a weird non GAAP metric) ‘only seven months after acquiring it.  Zynga purchased the developer of popular iPhone / Android game Draw Something, for ~$180MM in March.

The company now expects EBITDA of $147-162MM, below prior expectation of $180-250MM issued July 25, which is lower than initial F’12 outlook of $400-450MM.
Title Performance

Zynga Inc (NASDAQ:ZNGA)’s two largest titles (FarmVille and CityVille) continued to decline during 3Q12 (respectively down 27% and 46% sequentially) and new titles like The Ville achieved disappointing peak DAUs (~7mn), especially compared with previous tent-pole titles, and have experienced significant drop-off of late. While over the past year it appears that Zynga has lost share on Facebook to other game companies like King.com, it appears during 3Q12 that Zynga’s share may have risen as a result of its more active release schedule.

Barclays notes that:

While we believe Facebook Inc (NASDAQ:FB) has diversified its sources of Payments revenue to include developers like Electronic Arts Inc. (NASDAQ:EA) and King.com, we still believe Zynga accounts for a significant portion of this revenue stream. We also believe Social gaming on mobile devices is growing at the expense of desktop, which is where  Facebook Inc (NASDAQ:FB) derives the majority of its Payments revenue. And while we note  Facebook Inc (NASDAQ:FB)’s efforts to further monetize its Payments platform via products such as  Facebook Inc (NASDAQ:FB) Gifts, we expect declining Zynga bookings and the mobile shift to remain headwinds for Payments.

Management also stated that it intends to implement cost reduction initiatives and rationalize its R&D pipeline in 4Q12, a minor positive, if viewed as an increased focus on profitability. JMP states that ‘Management Credibility Plummets Even Lower Following 3Q12 Pre-Announcement’

Zynga Inc (NASDAQ:ZNGA) has been downgraded by a multitude of firms including, Barclays, Raymond James, Morgan Stanley, JMP and numerous other firms.

Some value investors note that the stock now trades for approximately its net cash (the firm has no debt). Some value investors are stating that the company is a value stock since it has no debt. Pipper Jaffary notes this in a report issued this morning, stating:

Although valuation could go lower as the company burns cash to meet near-term working capital needs, the market cap now stands at just $3m above the sum of Q2 cash, liquids and the company’s HQ. An enterprise value of $103m suggests an EBITDA multiple below 1x assuming $150m in 2013 EBITDA. That said, we do not rule out a further reduction in estimates or a cash burn rate that fundamentally worsens the balance sheet.

This is true assuming that there is no future cash flow problems, and Management can be trusted to make the best decisions for shareholders. The management issue is a large question mark in this case, as we noted earlier. Additionally, a 50% write-down on a company purchased earlier this year, looks like a terrible use of shareholder money.

Disclosure: No position

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