If you spend a fair share of your time on social networking websites, you have got to be aware of Zynga Inc (NASDAQ:ZNGA), the company which has developed some of the best and most addictive online games. Zynga Inc (NASDAQ:ZNGA) sure does excite the populace with its addictive games, but it failed to excite its shareholders as the recent quarterly results confirmed that the company booked a dip in its margins.
So, is Zynga Inc (NASDAQ:ZNGA) a praiseworthy investment? I promise I won’t let my addiction of Zynga Inc (NASDAQ:ZNGA) games influence my judgment. I’ll let you know of my opinion, but first let us take a look at the company’s quarterly performance.
Analyzing the past
Zynga Inc (NASDAQ:ZNGA)’s revenue came in at $231 million, signifying a massive dip of 31 % from the preceding year’s quarter. Online games contributed 88% to the company’s top line while the rest was generated by advertising; a decline in the revenue of both of these segments damaged Zynga Inc (NASDAQ:ZNGA)’s revenue.
Advertising revenue dipped 33% to $27 million while online-gaming revenue plummeted 30.3% to $203 million. I personally believe that the company has not been able to consistently develop games that create excitement among its user base, which has led to this substantial decline in its top line. The waning popularity of Zygna’s older games like Farmville didn’t help the margins, either.
Zygna’s bookings dropped down to $187.6 million, signifying a dip of almost 38% from the year-ago quarter. The lackadaisical performance of the new mobile games contributed massively to this drop. Apart from that, the reduction in the numbers of daily active users (DAU) and monthly active users (MAU) indicates that Zygna needs to develop better games to prevent its users from losing interest.
The only positive to take from the recent results was that the dip in Zygna’s margins was narrower than expected. Analysts had estimated the revenue to drop to $183 million and the bookings to drop to $184 million. The company was comfortably able to beat the estimates primarily because of the 1% rise in the mobile bookings.
As a fan of Zygna games, I’m not happy with the recent results but, can the company perform better in the future? Let’s find out.
What does the future hold?
In the preceding quarter, Zygna launched five new mobile games, and the good news is that two of these games recently received Apple’s “Editor’s Choice” award. These new games will definitely help Zygna to temporarily amplify its sales, but the company will have to do this more often if it wants to achieve enduring success.
In order to cut back on its losses, Zygna is resorting to cost-cutting initiatives. The operating costs were down 29% to $261 million as the company reduced its labor and marketing expenses.
While Zygna continues to appraise its real-money gaming products in the United Kingdom, the company has made it clear that it will only focus on free-to-play social games in the U.S.A. This decision may not have pleased investors, but I think it’s an intelligent move considering that it will be tough to break into the real-money gambling industry in the United States given the mighty presence of the incumbent casinos.
Are these steps going to benefit Zygna? Yes. But, will they enable the company to revive its margins? I don’t think so. The reduction in the expenses may augment Zygna’s net income, but if the company really wants show good returns, it needs an exhilarating and strong product pipeline.
Peers may hinder Zygna’s success
What makes it even more difficult for Zygna is the presence of a few big name competitors like Electronic Arts Inc. (NASDAQ:EA), and Glu Mobile Inc. (NASDAQ:GLUU).
Electronic Arts Inc. (NASDAQ:EA) generated revenue of $495 million, but let’s just focus on the company’s mobile business as it is the only segment which can threaten Zynga Inc (NASDAQ:ZNGA)’s sales. The company’s revenue in the segment increased 30% to $103 million. The stellar performances of games like The Simpsons: Tapped Out and Real Racing 3 amplified Electronic Arts Inc. (NASDAQ:EA)’ margins.
Electronic Arts Inc. (NASDAQ:EA) is looking to make the most out of the exponential rise of the smartphone and tablet market by putting extra emphasis on developing mobile games. The expected launch of Plants v/s Zombies 2 has created great excitement among customers. The hype surrounding the game is huge, and it will certainly improve Electronic Arts Inc. (NASDAQ:EA)’ mobile business.
However, the company’s reluctance to introduce blockbuster games, like FIFA 13, on Android-based devices may have a negative impact on its sales in the future.
Apart from Electronic Arts Inc. (NASDAQ:EA), another company which poses a threat to Zygna is Glu Mobile Inc. (NASDAQ:GLUU). In the past, Glu Mobile Inc. (NASDAQ:GLUU) has kept many people glued to their screens with its exhilarating games. Glu Mobile Inc. (NASDAQ:GLUU)’s quarterly results were not great, as the company generated revenue of $17 million and posted a net loss of $2.3 million. Personally, I think the enforced in-app purchases have taken the fun out of Glu’s games leading to a decline in the number of active users.
To offset this loss, Glu Mobile Inc. (NASDAQ:GLUU) is looking to cut down on its operational expenses and launch a couple of new titles in the future. The company’s operational expenses in the first quarter were $19.3 million, signifying a dip of $1.4 million compared to the previous year.
The expected launch of games like Tons of Guns and Mobsters and Gangsters will definitely boost the company’s sales. Glu Mobile Inc. (NASDAQ:GLUU) is, however, delaying the launch of these titles, which may have a negative impact on the next quarter’s revenue. But it doesn’t matter as the company is focused on achieving its goal of long-term success.
Final remarks
Keeping the above facts in mind, I won’t consider Zygna a laudable investment, unless the company is able to excite the market place with its upcoming games. The waning popularity of Zygna’s older games and the presence of robust competitors will prevent the company from showing a good value in the future.
Ayush Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ayush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is This Stock Worth a Gamble? originally appeared on Fool.com is written by Ayush Singh.
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