Starting again
The restructuring plan is part of Zynga’s attempts to get out of its current situation on the way back to profitability. Analysts are confident that the company still has the opportunity to turn things around and start earning profits. However, the time it will take to effectively do that is likely to be longer than expected. Reports suggest that in the next one year, the social gaming company could become profitable. Betting on this estimate relies on the company’s progress in mobile, real money gaming, and of course revenue from its website.
The company’s 500 staff layoff represents significant amounts of long-term savings. However, there are costs associated with laying off staff, which usually hit first, before any benefits are realized. The severance costs and benefits continuance are likely to affect Zynga’s upcoming quarter, which again might make the decision taken by the company seem insignificant in terms of benefits. However, the company seems to have done the right thing considering the fact that it will need to keep hold of a majority of its $1.27 billion worth of cash going forward.
The company will need huge amounts of cash in its bid to give another shot at penetrating mobile platforms. The real money gaming also offers an exemplary opportunity, although this is only limited to two U.S states and parts of Europe. If all states allowed it then Zynga could be set for a huge upside. Therefore, the pitfall to this is the addressable market irrespective of the other challenges.
Competition
Zynga faces competition from Caesars Entertainment Corp (NASDAQ:CZR) on its online gaming venture, which it entered in conjunction with Bwin. Caesars Entertainment Corp (NASDAQ:CZR) is a veteran in the industry, and trumps Zynga’s attempts to lure the European market. The Las Vegas based company has established itself as a market leader in Europe, since the U.S offers limited opportunity. Only Nevada and New Jersey allow online gambling, and Zynga has already applied for licensing in each of the two states.
Social gaming is proving to be a tough challenge as well, as exhibited by Zynga’s rival Electronic Arts Inc. (NASDAQ:EA), which recently closed some of its Facebook-based social games. In a message to the affected players, the company wrote:
“Today we are informing players of the difficult decision to retire some of our Facebook games: The Sims Social, SimCity Social and Pet Society. For players who have enjoyed our games, we will be making a special offer to introduce you to a PopCap game. You’re a valued fan and we want to make sure you get a smooth transition to PopCap. More details about that offer will appear in-game soon.”
Furthermore, EA is not the only example with regard to risks associated with running social games. Activision Blizzard, Inc. (NASDAQ:ATVI) also closed Diablo III. This begs the question whether Zynga is any different as it continues making losses from this core unit.
Interestingly, Zynga has the best gross margins against its competitors. The trailing 12-month gross margin stands at a massive 73%, compared to Electronic Arts’ 64%, and Activision Blizzard’s 66%. Ceasars’ gross margin is the lowest at 48%. However, contrary to Zynga, Electronic Arts and Activision Blizzard, Inc. (NASDAQ:ATVI) are profitable. The two giants’ profit margins stand at 2.58% and 24.38% respectively. Operating margins for the trailing 12-months are pegged at 3% and 31% respectively, as compared to Zynga’s 0%. Activision is the biggest of the four companies with a market cap of $15.98 billion and trades at a 13.30 P/E, while Electronic Arts’ market cap is pegged at $6.92 billion,and trades at 73.82x. On the other hand, Zynga’s market cap of $2.37 billion is only superior to Ceasars’ at $1.66 billion, and both companies are unprofitable.
