Nobody likes a naysayer, but when there's real money involved,
don't follow the herd or the hype. On Wednesday, shares of Zynga
) are up more than 14 percent after the company launched two
real-money casino games in the U.K.
That cute little farm animal company is entering "sin stock"
territory and by the looks of it, investors couldn't be
But investors might be overreacting. In a research note today,
Jefferies lays out some reasons why.
The U.K. Isn't Exactly a Cash Cow
Jefferies estimated that only six to nine percent of the
company's revenue comes from the U.K. That's somewhere between
$77 and $115 million in 2012. That number could rise with the
addition of real money gambling but for now, it's not doing much
to fuel the company's growth.
You Can Only Play the Games on the Zynga Website
Zynga is all about Facebook (NASDAQ:
). It's true that it's putting a lot of work into ramping up the
website but revenue coming from Zynga.com accounts for less than
one percent of revenue. Facebook accounts for 81 percent and its
mobile games, 18 percent. The company faces the challenge of
driving traffic to its website to play the new games.
What about Cannibalization?
Zynga Poker is currently the second most popular of its online
games with global revenue of $243 million or $15 to 22 million
annually in the U.K. It's too soon to know if the real money
games will cannibalize Zynga Poker but investors should watch
Zynga Doesn't keep all of the Profits
The sharing agreement between Zynga and its U.K. partner,
Bwin.party is unclear but sharing revenue on what will be a low
revenue venture, at least in the short term, probably won't leave
enough to get investors excited.
Can't Do it in America
A few states allow online gambling, but Jefferies believed
that Zynga will wait until it's legalized at a national level.
Until then, it's too much of a headache for what would be too
According to CNN, the gaming industry is lobbying hard for
legalization. The CEO of Caesars Entertainment (NASDAQ:
) Wallace Barr said, "I can say with tremendous confidence that
people will be able to play online legally in the United States
in many places very soon."
He might be right and if he is, this could be a major revenue
driver for Zynga since it will have already figured out the
formula in the U.K. Others would likely take time to catch
Maybe that's what has the stock up today but if you believe
Jefferies, a new revenue stream is bullish but don't "bet" on big
profits just yet.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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