The New Game Plan for Zynga Inc (ZNGA): Will it Work?

Silver lining in the cloud

Despite all of its shortcomings, Zynga does have a couple of trump cards. Its poor performance in the stock market aside, the company is flushed with funds. Zynga’s balance sheet is also debt free, further boosting its capacity to weather the storm. Its cash pile of $1.67 billion does generate confidence.

It also received some institutional backing as Jana Partners revealed its $86 million worth of stake in the company. While institutional investment is generally a good sign for a stock, the point to be noted here is that Jana is managed by activist investor Barry Rosenstein. Since Zynga has been underperforming for quite a while, Jana may resort to pressurizing management to change their business track. It may also try to force sale of the company as Zynga Inc (NASDAQ:ZNGA) is fast becoming an attractive takeover target.

Zynga has long been speculated to be on Yahoo! Inc. (NASDAQ:YHOO)’s shopping list. Yahoo! Inc. (NASDAQ:YHOO) is currently on an acquisition spree and has made a number of high-profile purchases, including the acquisition of the Tumblr blogging platform. Yahoo! is virtually absent in the mobile and social gaming arena, and this is exactly where a Zynga acquisition could help it. Zynga’s current valuation makes it an expensive proposition, however, and Yahoo! Inc. (NASDAQ:YHOO) is likely to shy away from such commitment after spending more than a billion dollars on Tumblr. Yahoo! is in the process of reinventing its business and has recently revamped some of its services, including Yahoo! Mail and Flickr.

Facebook too seems like all too natural of a partner for the struggling gaming company, and Google Inc (NASDAQ:GOOG) may also want to augment its interest in the company. Zynga’s takeover potential has been fueled by various research firms including Wunderlich Securities.

Investment takeaway

Zynga is currently hanging on to the hopes of developing a lucrative online gambling business. While the company will certainly add a new revenue stream this way, the competition is going to be tough and there is no clear indication as to when online gambling will be allowed in the US. Overall, Zynga Inc (NASDAQ:ZNGA) does not hold much appeal as a good investment target.

The article The New Game Plan for Zynga: Will it Work? originally appeared on Fool.com and is written by Jag Mitra.

Jag Mitra has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jag is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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