This Just In: Upgrades and Downgrades – Zynga Inc (ZNGA), Glu Mobile Inc. (GLUU)

I mean, yes, Zynga has a lot of cash and assets now. But it’s burned through $36 million in negative free cash flow over the past year. How much cash will it have left after tonight’s earnings update? And its assets — a few servers, some work stations, some desks and chairs? This isn’t a heavy equipment manufacturer, folks. These assets are going to depreciate fast.

Meanwhile, the company’s relationship with Facebook Inc (NASDAQ:FB) isn’t as strong as it once was, endangering a revenue stream that Zynga’s depended upon for most of its lifetime. (And speaking of which, if you think that Facebook looks overvalued at 2,868 times earnings, how much more overpriced is Zynga, at… infinity-times-the-profits-it-doesn’t-earn)?

Foolish takeaway
When you get right down to it, valuing a profitless company on the revenue it’s bringing in — but not earning profits from — seems to me a very circa-1999 way of thinking about investments. Sure, it’s possible that Bank of America is right about Zynga, and that tonight’s earnings report will wow the investing world, and renew investors’ faith in a stock that’s so far lost 81% of its value over the past year.

But if you ask me, the safer way to play tonight’s earnings release is to refuse to play the earnings game at all. Why buy Zynga on a gamble about what it might announce tonight? Why not just wait for the numbers to come out, read them, and then make an informed decision on whether the stock is profitable enough to earn you a profit from buying it… or not?

That’s the approach Northland took when hedging its bets on Gluu Mobile ahead of earnings last week. It’s the approach I intend to take toward Zynga tonight as well.

The article This Just In: Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard and Facebook. The Motley Fool owns shares of Activision Blizzard, Bank of America, and Facebook.

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