As a result, Zynga Inc (NASDAQ:ZNGA) anticipates a second quarter loss between $28.5 million to $39 million, steeper than its previous forecast for a loss between $26.5 million to $36.5 million. Zynga’s fundamentals tell a similarly bleak tale.
| Forward P/E | Price to Sales (ttm) | Price to Book | Debt to Equity | Profit Margin | Qty. Revenue Growth (y-o-y) | Qty. EPS Growth (y-o-y) | |
| Zynga | N/A | 1.94 | 1.27 | 5.37 | -9.80% | -17.90% | N/A |
| Electronic Arts | 16.16 | 1.83 | 3.06 | 24.66 | 2.58% | -11.60% | -19.20% |
| Advantage | Electronic Arts | Electronic Arts | Zynga | Zynga | Electronic Arts | Electronic Arts | Electronic Arts |
Source: Yahoo Finance, 6/5/2013
Although Electronic Arts is not a fundamental winner by any means, it is still a better bet on the rise of mobile games. Electronic Arts has a large selection of well-known games (such as the recently acquired Star Wars) it can base games on. It also has more cash – $1.7 billion compared to Zynga’s $1.2 billion – to heavily market its products.
That brings us to another major problem with Zynga – why hasn’t the company used that cash hoard to invest in a smaller competitor, such as Cut the Rope creator ZeptoLab or Candy Crush maker King.com?
A final desperate gamble
While investing in ZeptoLab or King.com would make sense, Zynga has opted for the bizarre path of online gambling. Zynga recently introduced real-money games ZyngaPlusPoker and ZyngaPlusCasino in the U.K., which the company intends to expand into the rest of Europe. Some analysts have speculated that Zynga could even expand into China later this year, but that is highly unlikely, since online gambling is prohibited in the country. Brick-and-mortar casino gambling, on the other hand, is only allowed in the special administrative region of Macau.
Back at home, Zynga has already applied for an online gambling operator license in Nevada. The bulls claim that the global online gambling market could reach $40 billion to $45 billion in the next five years, and if Zynga can claim just 1% of that market, it could add $400 million to $450 million to its annual top line. But that’s if Zynga can actually still survive for another five years.
The Foolish Bottom Line
While Zynga Inc (NASDAQ:ZNGA)’s online gambling business is an interesting side venture, I don’t think it will do much to offset its declining top and bottom line growth, poor retention of users, and steady loss of market share to smaller rivals and Electronic Arts. I don’t expect Zynga to be able to stand back up by itself. Instead, I think Zynga could be taken over by a larger rival, get swarmed by activist investors, or simply fade away. In other words, this is a volatile company that individual investors should avoid at all costs.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is This the End for Zynga? originally appeared on Fool.com and is written by Leo Sun.
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