Is Zynga Stock A One-Trick Pony?

  • Zynga’s success with Farmville did not translate to newer platforms.
  • Game companies tend to be platform specific.
  • Management is wise to hoard cash, but expecting success with it is a hope, not a plan.

The rise, fall, and inability to get up of Zynga (NASDAQ:ZNGA) proves an old adage for anyone investing in video game companies. Most are one-trick ponies. That is, most game companies have one franchise, one reason for being, and when that reason is replaced, it is too late to get out.

Nintendo had a great run with games like Pokemon, but when they faded, it did too. Sony Corp (NYSE:SNE) and Microsoft (NASDAQ:MSFT) had great runs with specialized game machines, but as players moved to other platforms, especially mobile, these companies faded.

Zynga's reason for being was Farmville, a game built for the Facebook (NASDAQ:FB) social media platform. But players have gravitated elsewhere, first to devices like the iPad, where they found Candy Crush, and later to mobile platforms, where they found Machine Zone's Fire Age and, more recently, Mobile Strike.

Zynga has been left behind, and if you got in anywhere near their 2012 IPO looking for the "next" Farmville, it doesn't exist.

Because of ongoing development costs, Zynga has never turned a profit. For all of 2015, it lost $121 million, 13 cents per share, on revenue of $765 million. In 2014, it lost $226 million, 26 cents per share, on revenue of $690 million. The only corporate strength lies in its balance sheet, which is clear of debt and held nearly $1 billion in cash and short-term investments at the end of 2015.

The hope has always been that a company that had one hit could either create or buy another one. This has proven to be a forlorn hope, time and time again.

This is because every gaming platform is different, demanding different development models. And most game developers, unfortunately, have only one. It's not like music, or film, where the platform evolves but remains relatively stable.

The differences between running a game on a social network like Facebook and on a mobile device like the iPhone go well beyond the differences in the user interface. They go to the demographics of the audience, and the attitude they bring to choosing games. Farmville was highly social and skewed towards female. The games developed by Machine Age are shoot-em-ups and skewed towards males. Even if both are free-to-play, they may require different monetization strategies. It takes a management that is immersed in the platform to come up with a hit, and that experience does not translate as investors might expect.

Zynga, to its credit, seems to have finally learned its lesson, hence the hoarding of cash and avoidance of debt. But $1 billion in cash is not enough reason to own part of $2 billion in equity. Buying Zynga stock now, on the off-chance that the cash will buy a hit-maker like Machine Zone, is more of a hope than a plan, and is not recommended.

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