Why Zynga Inc (ZNGA) Got Rocked

Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.

What: Shares of Zynga Inc (NASDAQ:ZNGA), a developer and marketer of online social games, dropped as much as 14% after the company announced plans to cut jobs and guided toward the low end of its previous bookings forecast.

So what: Zynga Inc (NASDAQ:ZNGA) announced that it plans to cut a sizable 520 jobs — roughly 18% of its workforce — by August in order to save $70 million to $80 million annually. The move is being made as gaming competition and the costs of game development are steadily rising. The cuts will encompass all divisions of its workforce. Zynga reaffirmed its second-quarter EPS forecast, however, it also commented that bookings will be in the lower half of its previous forecast because many games outside of its Farmville franchise are underperforming. Despite the underperformance, Zynga Inc (NASDAQ:ZNGA) also stuck to its previous full-year EBITDA guidance.

Now what: Yuck, and more yuck! That professional opinion is based on the fact that the social gaming industry is built on rising development costs with a declining base of customers that appear willing to pay for premium aspects of these “free” games. I suspect Zynga Inc (NASDAQ:ZNGA) is going to have a difficult time staying profitable even with these expense cutes, and its high-growth days appear to be nothing but a mirage now. If online gaming were somehow legalized in the U.S., Zynga Poker may have a shot at making this a viable investment. As of now, though, I’d have to say there’s absolutely no enticing reason to own Zynga Inc (NASDAQ:ZNGA) stock and would suggest keeping a safe distance.

The article Why Zynga Shares Were Rocked originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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