Investors Should Stay Away From One-Hit Wonders Zynga And King

  • Zynga and King are two online game developers that succeeded to unlock the potential of web 2.0 and were able to gain substantial revenues from it.
  • These companies used the bullish market and buzz around their games and went public in a very disappointing debut.
  • Both of them presented in Q2 2014 another decrease in revenues that increased investors’ concerns about their ability to generate revenues apart from their good old titles.
  • Each company is handling that situation differently: Zynga is investing further in its business model while King attempts to penetrate new markets.
Zynga and King stock analysis

Zynga (NASDAQ:ZNGA) and King Digital (NYSE:KING) are two of the biggest phenomena of the web 2.0 era. Web 2.0 is a nickname for the modern uses of the internet post the dot-com bubble burst, and it has brought to our lives social networking, talkbacks, video streaming, gamification, location-based services, and many more trends that rely on human interaction. While web 2.0 has evolved and Facebook has come into our lives, many companies have tried to generate revenues from this new internet use.

Zynga is one of the few that have succeeded in unlocking the potential of social networking sites and have offered games that are integrated into Facebook, such as FarmVille, Zynga Poker, and Mafia Wars. Later, Zynga offered independent apps in Apple's App Store and Google Play and was able to charge for some of the games.

As shown in chart 1 below, most of Zynga’s revenues are generated by in-app purchases or paid games, and the rest are generated from selling ads on its free games.
Zynga segmental revenues

Since it went public, Zynga’s revenues have slowly decreased, and in Q2 2014, its $153 million revenues were 52% lower than its Q1 2012 revenues. Most of the decrease was driven by the online games segment that shrunk by 55% since Q1 2012 to $130 million in Q2 2014. In light of the drop in revenue and the stagnated negative bottom line, Zynga’s stock price has fallen 70% from its IPO price and 80% since its all-time high in February 2013. In its Q2 2014 earnings release, Zynga missed the revenue consensus by $16 million and cut 2014 revenue guidance.

Similar to Zynga, King was able to unlock the potential of gaming in the social networking era when it introduced Candy Crush Saga in 2012 and quickly became the number one game on Facebook. King went public in a disappointing IPO in March 2014, and the stock price plunged 16% below the IPO price of $22.5 on the first day of trading. In its Q2 2014 earnings release, King reported $593 million of revenue that was $20 million lower than its Q1 2014 revenue, and reduced its guidance for the entire 2014 year as a result of a drop in Candy Crush Saga’s revenue.

Both the companies have a similar background story. They both used the bullish market to go public after they had one mega-hit game that got lots of traction. Their IPO’s were disappointing, and their stocks closed below the IPO price on the first day of trade. Both the companies have tried to develop new revenue streams to minimize their dependencies on the lead titles.

Zynga announced a multi-year agreement with Warner Brothers Interactive Entertainment to license Looney Tunes. That agreement is expected to be a game changer for Zynga, and a new revenue stream could be added to the dropping online gaming segment. The success of that move depends on Zynga’s ability to make the future Looney Tunes games a viral success like its prior successes with Farmville, Mafia Wars and Zynga Poker. King takes a different approach, acquiring Singaporean game developer NonStop Games in an attempt to enter the big players’ league and compete with EA and Activision in the core gaming market.


Zynga and King are both online games developers that went public after the success of one of their titles. Both companies made a disappointing debut in the stock market and closed their first day of trading with stock prices below their IPO value. Revenues for these companies are in constant decline and revenue growth depends on the production of numerous successful titles. Each company has adopted a different strategy to stall their problems; Zynga signed a multi-year agreement with Warner Brothers to make Looney Tunes games fit into its traditional business model, while King acquired a Singaporean game developer in order to penetrate the core gaming market. Both of these companies are far from being stable and have huge potential risks due to revenues largely being tied to past games, which are beginning to fade away. Investors looking for a solid investment should stay away from them until they prove that they are more than just one-hit wonders by generating revenues from new initiatives.

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Comments on this article and ZNGA stock

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John Horner
Zynga will be ok once the CEO can get their gambling site online in the united states like they did in England. It will make them a few hundred million each year if they can get it to market. They have 1.2 billion in cash and should be around a $5 stock if their new football release does well. They should add a fantasy option with pay options to assist in their marketing of the new football title as that has a huge following. This stock will only be going up from this level and anyone shorting it from this level is insane! If don mattrickcan earn half that salary of his, he should be able to right the ship with a 100 to 200 percent return on investment from this level in the next 12-18 months. Anyone not investing at least 5 percent of their portfolio here is missing a tremendous opportunity!
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