The price of Zynga saw a sudden rally in 2013 due to the increased optimism surrounding its real money gaming initiatives. Zynga’s business model is in transition, as the company is trying to broaden its revenue base significantly by tapping into these more profitable business opportunities. Here’s a deeper breakdown of Zynga Inc (NASDAQ:ZNGA)’s new possibilities in the form of a SWOT Analysis.
Strengths
Partnership with bwin.party: Zynga Inc (NASDAQ:ZNGA)’s partnership with a top real money gaming company, bwin.party is a major positive for the company. The company just unveiled its first offerings of games in the United Kingdom on the web and as well as a downloadable format. This foray into online gambling marks a strong upside potential for the company and also diversifies Zynga’s revenue base of making money mostly from online social games.
Reduced Dependence on Facebook: Zynga Inc (NASDAQ:ZNGA) doesn’t have to pay revenue sharing fees for gaming in non-Facebook platforms anymore. After building its user base, Zynga’s altered contract with Facebook Inc (NASDAQ:FB) will allow it to keep the 30% fees that it had to previously share with Facebook even for gaming payments received on non-Facebook platforms. Revenue bookings from Facebook made up the lion’s share of Zynga’s revenues and going forward, this should decline substantially.
Mobile Usage and Monetization: Zynga has managed to its grow presence on mobile rapidly with active users on mobile growing 75% on a Y/Y basis and ended 2012 with 72 million MAUs. And monetization on mobile is stellar as well with sizable revenue bookings on mobile which represents 21% of total bookings in Q4 2012. Zynga is also the 5th largest mobile platform for time spent on mobile, and for the daily audience on mobile, according to comScore.
Weaknesses
Declining Traffic: Zynga Inc (NASDAQ:ZNGA)’s daily users came trickling down to 56 million at the end of 2012, from a high of 72 million. The decline can also be seen from the monthly active base, which declined to 298 million active users from a high of 311 million users.
Weakened ties with Facebook: Facebook Inc (NASDAQ:FB)’s importance for Zynga is paramount, and even more so because Facebook is directly responsible for driving a lot of user traffic to Zynga’s platform, as well as a major outlet for revenues. Zynga is a leading developer on Facebook with 5 of the top 10 games, and going forward, weakened ties with Facebook, might impact user eyeballs as well as negatively impact the amount users spend on online gaming and also in gaining newer customers.
Lack of Recurring Purchases: The business model of Zynga Inc (NASDAQ:ZNGA) revolves around engaging and stimulating the large pool of users to play the games, and to make these customers purchase social gaming products. Often times, users are likely to be reluctant to purchase such social gaming goods on a recurring basis, which is a negative for the company.
Persistent Losses: While the company’s losses have narrowed substantially, the company is still losing money. Zynga’s net loss for 2012 stood at $209 million on revenues of $1.28 Billion. And in 2011, Zynga Inc (NASDAQ:ZNGA)’s net loss was a whopping $404 million.
Opportunities
Expand Real Money Gaming: A major opportunity for the company lies in its ability to enter the real money gaming market in the U.S. Zynga is hoping to build up an online ecosystem for real money gaming and has already applied for a license in the state of Nevada. Zynga Inc (NASDAQ:ZNGA) can use its technical know-how and adopt a similar playbook from its UK launch for the U.S. market and position itself for longer term success.
Grow Advertising Business: In addition, to selling social gaming goods, Zynga makes a decent amount of revenues by showing advertisements on its platform. And the company’s advertising revenue in 2012 was $137 million, which represents a year-over-year growth of 85%. And going forward, Zynga can grow its ad revenues substantially by tapping more brand advertisers, who command huge advertising budgets.
Third-party Gaming Publishers: Zynga has been working with a number of third party developers to publish the games of these third parties on Zynga’s large ecosystem of 298 million users. A few successful franchises and the offering of newer and fresher games from third parties should lead to a lot of revenues for Zynga.
Introduction of 3D Games: Zynga Inc (NASDAQ:ZNGA) has introduced a 3D version of its popular game, FarmVille in the last quarter of 2012. As FarmVille was a big hit for the company, it generated total player purchases of more than $1 billion, including partner fees. If Zynga can introduce more 3D Gaming experiences on its existing franchises as well as build newer franchises, the enhanced user experience will lead to more gaming revenues, as well as pave the way for more advertising revenue.
Expand on Other Platforms: The company’s games are available on some of the leading platforms in the world including Google+, Zynga.com, chinese Internet powerhouse, Tencent as well as on Android and Apple’s iOS devices. Zynga should harness and engage more consumers to make purchases in these global platforms including some of the mobile platforms and reduce its dependence on Facebook Inc (NASDAQ:FB) alone.
Threats
Casual Players: A number of players on Zynga’s platforms are largely casual players who don’t play on a regular basis. Irregular players might stop frequenting the site altogether, as many analysts and investors have termed the social gaming industry ‘a fad.’
Competing Gaming Platforms: A number of smaller social gaming platforms like Kabam are coming up and many of them will likely gain more widespread consumer acceptance and might negatively impact Zynga Inc (NASDAQ:ZNGA).
RMG Is Very Competitive: The real money gaming platform is a very competitive market and faces a lot of regulatory scrutiny on a regular basis as well. Some of the leading companies have large and established audiences in their respective platforms.
The Takeaway
While Zynga is still a favorite amongst many short-sellers, the company’s foray into real-money gambling with casino and poker games might be a success, and might lay the foundation for greener pastures down the road.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook.
