Although a far larger organization, Activision Blizzard, Inc. (NASDAQ:ATVI). has proven its worth and profitability within the gaming space through a past commitment to R&D and disciplined actions to achieve profitability. Activision has a market cap of over $16 billion and has been able to achieve profit margins of nearly 25%.
Activision Blizzard, Inc. (NASDAQ:ATVI) has also experienced difficulty in fully transitioning to the world of mobile in the face of its desktop-driven business, but the company has put forth a comprehensive plan to cut costs and invest in the proper channels of growth that will ultimately build upon the foundation the company has set forth over the past 20 years. Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts have achieved profitability and must build upon their respected positions in the marketplace.
Unless Zynga is able to build the proper channels of content and gaming dispersion, the company is on track for a future of layoffs and a slow death. Current investors should ask the question, “Would you buy it now?”
For onlookers who see a “cheap” stock
The answer to the aforementioned question, “Would you buy it now?” comes down to the company’s past ability to deal with adversity and a changing internet reality. The way the company has handled the past has been to continue to build new games that have built its user base, but have not built a platform that is conducive to a mobile strategy: at least a strategy that is profitable.
These are ominous signs for traders and investors alike and should raise red-flags. Electronic Arts is a company that has gaming exposure, but has a business model that works and has proven profitable. The company develops, markets, and distributes entertainment software, which provides Electronic Arts a wider breadth of business opportunities than that of Zynga. Electronic Arts is currently trading at a PEG ratio of 1.27 and is achieving a profit margin of roughly 2.5%. These are respectable figures and point to a company that has been able to adapt in the gaming industry: an attribute Zynga Inc (NASDAQ:ZNGA) has been unable to show investors.
Conclusion
Rising competition, an ever-changing gaming environment, and a rocky track record make Zynga a company investors should be wary of in both the short-term and the long-term. As Dennis Gartman discusses:
The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low.” Nor can we know what price is “high.” Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.
Zynga must do more than control its costs through workforce reductions and must prove that it has the power to transition from a desktop to a mobile strategy. The signs currently point to a Zynga Inc (NASDAQ:ZNGA) that is off track and under-performing and there are few clues indicating a change in Zynga’s downward trajectory.
The article Zynga: What Investors Should Do Next originally appeared on Fool.com and is written by Justin Weinstein.
Justin Weinstein has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Justin 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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