So in true confession style Michelle Tea wrote about her temping experience at a Frisco social gaming company that anyone who knows anything about gaming stocks knows is Zynga Inc (NASDAQ:ZNGA). I hope I haven’t outed her with this revelation but the clue (the company is named after the founder’s dog) is thinly veiled…c’mon, get real.
My favorite part was her friends’ reaction to the gig: “You’re going to be RICH! Will they give you STOCK? Oh my GOD!” Thankfully for her she was paid with coin of the realm and free snacks as Zynga is still trading under five bucks.
The perks she was allowed (and those she wasn’t as a temp) are frankly unreal for a company that still sports a P/E of negative 11.92. Every floor had a different free snack theme area, free massages, a pub and gym in the basement, and trained baristas pouring free coffees were among the many amenities. CEO Mark Pincus spent a reported $228 million on headquarters last year and then spent $210 million on OMGPop, a small game company whose only claim to fame was Draw Something.
But there was a more poignant comment to her story about how CEO Pincus had thrown employees and shareholders under the bus while living the high life (specifically referring to his 1907 Gold Coast mansion) after having sold off so many of his shares before the stock plummeted from $14.22 to a low of $2.09. Pincus has been listed on several different stock sites including The Motley Fool among the worst CEOs of 2012. The stock is down 75.73% over the last year.
Gambling on Zynga
On March 20, Bank of America/Merrill Lynch downgraded Zynga Inc (NASDAQ:ZNGA) from buy to neutral with a price target of $3.90 due to an unfavorable risk/reward valuation. Analyst Justin Post further added that only a new social gaming hit could bring an earnings surprise, and he deemed that unlikely.He also noted that Zynga could see serious real money online poker competition.
For the longest time it seemed the only hope for Zynga and its rival Glu Mobile Inc. (NASDAQ:GLUU) was online gambling with real money. When Nevada and New Jersey legalized online gaming both companies’ shares rallied. Both had already positioned themselves with British developers to offer real money online poker and casino games in the United Kingdom.
Zynga poker will probably happen but regulatory hurdles and competition will be fierce. While the advantage is always with the “house” (and that’s why I love casino stocks), if it does partner up with the likes of Wynn Resorts, Limited (NASDAQ:WYNN) as long rumored, expect Zynga Inc (NASDAQ:ZNGA) to fetch the short end of the stick. Game maker Electronic Arts Inc. (NASDAQ:EA)has also dipped its toes into the betting pool with its 2011 acquisition of PopCap Games. Interestingly, Forbes reported Zynga bid $1 billion for PopCap but PopCap went with EA for much less, $650 million cash and $100 million in stock.
Fool Johan Seijkens admirably explains Zynga’s business model of revenue streams from player purchased game goods, advertising, and possibly online gambling. He cautions Zynga has to continually create compelling games that advertisers want to sponsor and that encourage players to spend.
Zynga also has a symbiotic relationship with Facebook Inc (NASDAQ:FB) that is by no means secure after 2015, and the company has been trying to distance itself with its own online portal and make the important move to mobile as well as moving to its own Z-cloud. On March 21, the updated zynga.com relaunched, and players no longer have to sign in through Facebook with their real names to play. In past years Zynga earned 90% of revenue from its popular FarmVille, Words With Friends, and other games on Facebook.
What’s next on Zynga’s shopping list
Zynga still has $1.28 billion in cash and $100 million in debt. It could conceivably buy a hit game again, but based on the declining users of Draw Something almost immediately upon the deal’s closing Pincus must have felt some buyer’s remorse (like the stockholders).
As key executives and game developers flee the golden cage that is Zynga, one might wonder if Pincus should pull a reverse Marissa Meyer of Yahoo! and make the employees work from home. A company like Google Inc (NASDAQ:GOOG) can afford these kind of perks with the kind of money it makes, but Zynga can’t afford to keep overpaying for games that don’t end up being accretive and outrageous perquisites.
The gaming sector’s hard day’s night
Glu Mobile Inc. (NASDAQ:GLUU), the leader in 3D freemium games for mobile, suffers many of the same challenges as Zynga but is performing better, beating on top and bottom line on its last 10-K filing on March 15 with margin expansion and a smaller loss per share than the year ago period. Q4 EPS came in at – $0.11 and revenues at $20.8 million. Glu Mobile has no debt and is only down 21.00% over 52 weeks.
Analysts prefer Glu Mobile Inc. (NASDAQ:GLUU) going forward with the majority recommendation at Outperform with an upgrade to Outperform on March 18 from Northland Capital. Glu Mobile never had the same dependence on Facebook, and its head start in mobile gives it an advantage over Zynga Inc (NASDAQ:ZNGA). Caution though, short interest in Glu Mobile is even higher at 23.10% than at Zynga with 16.50%.
Electronic Arts has also been suffering with its CEO John Riccitiello’s resignation on March 18, preannouncing an earnings disappointment; and speaking of PopCap, its Bejeweled producer just jumped ship along with several other EA alumni to an indie game publisher. What next?!
However, Electronic Arts has a positive P/E of 32.36 and a PEG of 1.47. It has the popular SimCity, Madden, and Medal of Honor franchises, and its mobile offerings are outperforming rival Activision Blizzard, Inc. (NASDAQ:ATVI).
Game over
The whole gaming sector has had trouble lately, and it’s best to just stay away. The big gamers like EA are just too difficult to game here. If you think online gambling will be the savior of Zynga Inc (NASDAQ:ZNGA) and Glu Mobile Inc. (NASDAQ:GLUU), you should see who they partner with first. As long as spendthrift Pincus and his privileged minions run Zynga I would prefer Glu Mobile Inc. (NASDAQ:GLUU).
The article True Confessions of High Tech Hijinks originally appeared on Fool.com and is written by AnnaLisa Kraft.
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