Is Zynga Inc Moving Towards A Dot-com Fate?

Updated on

In its earlier days, Zynga Inc (NASDAQ:ZNGA) was seen as a fast-growing company with plenty of potential for revenue generation. At that time, investors believed that this internet company would be different from the companies involved in the dot-com bubble of 2000. However, many were wrong, as warnings signs were evident even before its initial public offering, says a report by Therese Poletti from MarketWatch.

Investors lose confidence in Zynga

Investors are cautious on the outlook of the company and its upcoming titles. In the second half of fiscal 2014, only a few titles are expected to be launched. As a result, Zynga shares are reeling, and investors are losing their patience in the stock.  Shares of the social game maker tumbled 30% this year and are receiving headwinds from competitors like King Digital Entertainment PLC (NYSE:KING)’s Candy Crush, as well as new online game titles like Kim Kardashian: Hollywood, from Glu Mobile Inc. (NASDAQ:GLUU).

Before going public, Zynga founders raked in huge profits by cashing out their shares in private, secondary market deals. Zynga, which is down 71.5% from its initial offering price of $10 in December 2011, is struggling to make a comeback now.

Zynga turnaround–is it working?

The gaming company that started with developing casual games to play on personal computers, such as Farmville, is now transforming itself to become a mobile gaming company. However, the recent quarter was lackluster, with only Farmville 2 released on the mobile side. Zynga CEO Don Mattrick said in a press release that the company is focusing on doing better and improving implementation across business segments. He said that substantial investment would be made in the highest potential areas of the future pipeline.

However, Janney Capital Markets analyst Tony Wible stated that Zynga is seeing a drop in revenue and incurring losses due to less spending by the big spenders on virtual goods.“The drop in ARPU [average revenue per user] is discouraging given the much anticipated launch of Farmville 2 this quarter,” Wible wrote in a note.

A drop-down in the ARPU indicates that the average user is moving away from the company’s titles and also that “whales” are abandoning Zynga and picking up lower-value players with new games. Wall Street analysts are negative on Zynga, with 75% of them rating it a Hold, 10% a Buy and 15% a Sell, according to FactSet.

Leave a Comment