Now, that argument has been destroyed. Last week, the company admitted that it no longer has any intention to pursue online gambling in the US. With that, the investment case for Zynga has completely changed, and any remaining investors must have faith in Don Mattrick’s turnaround effort.
No more online gambling
Last September, Zynga Inc (NASDAQ:ZNGA) hired online gambling exec Maytal Olsha from UK company 888 Holdings. Shares began to rally on the hope that the company could use its gaming assets in the world of real money gambling.
Feb. 8, Zynga shares soared 11% after New Jersey’s governor voiced his support for online gambling. The state — along with Nevada and Delaware — later moved to fully legalize online gambling, and Zynga shares continued to move higher.
But then, early in July, Zynga hired Don Mattrick to be its new CEO. Mattrick came from Microsoft Corporation (NASDAQ:MSFT), where he ran the Xbox division, and was clearly more focused on video games than casinos.
As I wrote back at the time, despite the fact that Zynga Inc (NASDAQ:ZNGA) shares soared on the announcement, Mattrick’s hire suggested that Zynga would be focusing on gaming, not gambling.
Facebook gaming isn’t flawed
When Facebook Inc (NASDAQ:FB) reported earnings last week, one thing was clear: Zynga’s problems with its business model are company-specific, and not endemic to the broader social gaming industry.
In the most recent quarter, Facebook Inc (NASDAQ:FB)’s gaming revenue actually increased by some 7% despite the fact that Zynga — which has long been Facebook’s key gaming partner — has struggled. During the earnings call, Facebook specifically mentioned one title (Candy Crush) as contributing to the growth.
Candy Crush has been enormously popular for the game’s developer, UK-based King. By some estimates, the game is projected to earn King over $200 million in the next year.
Candy Crush’s success suggests that Zynga Inc (NASDAQ:ZNGA) is victim of poor management, not a bad business model, and that more broadly, Facebook Inc (NASDAQ:FB), which is still reliant on social gaming for a big chunk of its revenue, should not be too concerned with the decline of Zynga.
What’s the plan?
But the problem is that Zynga Inc (NASDAQ:ZNGA) still lacks a turnaround plan. Mattrick is widely hailed as a great executive (Wedbush’s Michael Pachter said he thought Mattrick would be Electronic Art’s next CEO), but he has yet to articulate a concrete plan.
The most Mattrick has offered has been some vague platitudes about getting “back to basics” and “looking under the hood.” Of course, it’s hard to fault the guy — he’s only been on the job for a few weeks.
Still, if investors are buying Zynga today, I have no idea what they’re going off of. Until Mattrick articulates his ideas for the future of Zynga, there isn’t a story from which to consider an investment.
The move to mobile
The one thing Zynga Inc (NASDAQ:ZNGA) has going for it is that it’s a big developer on a growing platform. Social and mobile gaming have continued to explode in popularity, while other traditional forms of gaming (console, PC) have remained relatively stagnant.
Activision Blizzard, Inc. (NASDAQ:ATVI) has unquestionably been a better stock to own than Zynga in recent years, but given the trends in the gaming sector, that might not always be the case.
Activision Blizzard, Inc. (NASDAQ:ATVI) has stuck with the classic gaming paradigm, dominating the consoles with titles like Call of Duty, and remaining a key player in the PC gaming industry with hits like World of Warcraft and Starcraft. As recently as May, CEO Bobby Kotick downplayed mobile, saying that there just wasn’t anything there yet to draw Activision in.
But with Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) rumored to be working on some form of gaming consoles, the mobile platform could become increasingly important in the coming years. If Android and iOS dominate the living rooms of gamers, companies familiar with that platform (like Zynga) may have the edge over companies that do not (like Activision Blizzard, Inc. (NASDAQ:ATVI)).
Investing in Zynga
Now that the bull case for Zynga Inc (NASDAQ:ZNGA) has been squashed, it’s difficult to see a real argument for Zynga, at least in the near-term. If new CEO Don Mattrick can put forth a convincing turnaround plan, investors could reassess the company.
Certainly, Zynga could have a bright future under better management. Social gaming continues to grow, as evidenced by Facebook’s recent quarter. If Mattrick can capitalize on that trend, Zynga could be a great turnaround story. But until then, investors should stay away.
The article Zynga Just Pulled a Complete Bait-and-Switch on Investors originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Facebook. The Motley Fool owns shares of Activision Blizzard and Facebook. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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