The year 2013 was a volatile one for Zynga (
) as the company went through a significant strategic and
management transition and terminated some of its well known games.
Revenues and profits continued to slide as the user base shrank.
The only silver lining was that the company's key franchises
Farmville, Farmville 2 and Zynga Poker continued to lend support.
Going forward, Zynga will primarily focus on mobile gaming and
further development of its own gaming platform. Under the new
leadership, the company is confident that it can reinvent itself
and bounce back by bringing more stability and predictability to
its business model. In this analysis, we will discuss key
developments for Zynga in 2013 that will essentially shape its
strategy for the next year.
Our price estimate for Zynga stands at $3.33
, implying a discount of about 15% to the market price.
Check out our complete analysis of Zynga
Operating Metrics Continued The Unfavorable
Zynga faced a sharp decline in several of its operating metrics
in 2013, including the number of monthly active users, the number
of daily active users, revenues and adjusted EBITDA (earnings
before interest, taxes, depreciation and amortization). This
resulted from the continued decline in popularity of its games,
strained ties with Facebook (
) and closure of some under-performing titles in the second
quarter. For the full year 2013, we expect Zynga's revenues to be
down by roughly 30% as compared to 2012.
(Active User count in million, Revenue/EBITDA in $
As a result of the strategic shift towards introducing fewer but
better titles, and to control its operating costs, the company
The Ville, Empires & Allies, Dream Zoo
on Tencent in Q2 2013. In mid 2013, it also announced a reduction
of its workforce by around 18%, producing a reduction in force of
approximately 520 employees for an estimated $70-$80 million in
pre-tax savings for the company. Given the sustained period of
duress for the social gaming giant, there was a management
shake-up as well.
Strategy Shift With Management Shake-Up
Zynga's stock gained around 20% over a few days following the
announcement of Don Mattrick as new CEO. Mattrick has a great track
record in heading Microsoft's (
) Xbox division as well as Electronic Arts (
), and could offer a fresh perspective and help the company in
managing its costs better.
Zynga operates in the social gaming space and its products
(games) are directed at casual gamers. The nature of the business
is such that the customers tend to be fickle, and it becomes
necessary to launch new games frequently to compensate for the
decline in the user base of previously successful games. This is
not an easy task and requires a great deal of innovation and
effort. Zynga's recent quarterly results suggest that the company
is struggling and the new games haven't attracted many users.
As a result, the company is shifting its focus towards mid-core
games and the new CEO is on-board with it. These games tend to be
more engaging and sustainable as they combine the engagement level
of a core game with the learning curve of a casual game. This can
potentially allow for retention of a large user base while
promoting in-game purchases as the games are designed to be more
engaging and users are likely to pay to upgrade, rather than drop
off once the free-play scenarios are completed. Zynga launched
in the second quarter of 2013
which marked its foray into action RPG (role playing game).
Real Money Gaming Ambitions Didn't Pan Out As Expected,
But Opportunity Remains
Zynga rolled out real-money games
in the U.K. in early 2013. It tried to do something similar in the
U.S. before dropping the plan and sticking to regular social
gaming. While that was certainly a setback, the global market for
real money gambling is significant and Zynga can add substantial
value to its stock if it can establish itself in this market
According to the management of Betable, a gambling platform, the
online gambling market outside the U.S. is worth more than $32
billion. Gambling research group H2 Gambling Capital estimates that
the global online gambling market stood at 21.73 billion euros or
19 billion pounds in 2012. The research firm further expects this
market to grow by 30% over the next three years. While Zynga has
already launched in Europe, it may want to expand to China later
on. China's online gambling market is expected to grow to close to
$12 billion in 2013. This may not be surprising as Macau, which is
a special administrative region of China, is already the biggest
casino market in the world.
Zynga can make a big difference to its business if it can tap
this market successfully. It appears that the global online
gambling market could reach $40-45 billion in the next five years,
and even if Zynga can grab 1-2% share of this market, it could add
additional $400-$900 million in revenues. This translates into
upside of about 20-30% to our price estimate. However, the company
will have to deal with competition from gaming incumbents such as
Caesars Entertainment, which already operates online gambling
services in Europe and has bought social and mobile game maker
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