First off, virtually everything for the company is dependent on Facebook (FB), though there has been improvement. In 2012, the social media site generated 87% of Zynga’s revenues, and that figure is now down to 76%. If there are any restrictions to access, it can negatively impact game playing. One ongoing example is The People’s Republic of China, where Facebook is blocked.
Gaming companies operate within a competitive landscape. Aside from the need to outperform peers such as Glu Mobile Inc. (GLUU), King.com Inc. and Softbank’s Supercell, the corporations can have other risky traits in common. Examples include a small percentage of users generating revenues, and consistent losses.
There are positives for Zynga. As of the third quarter, it has $897 million in cash, against a market cap of $2.93 billion; with a noticeable amount of goodwill, $228 million, that is to disappear someday. The company’s financial position is strong for the most part. Further, The Altman Z-Score and Beneish M-Score are both shown to be within healthy ranges.
Zynga does have a $200 million share repurchase in effect since October 2012. There is no indication that it has been used; however, feelings about buybacks can vary and the authorization is probably viewed favorably by some.
Zynga has some peculiarities. Founder and Chairman of the Board Mark Pincus, who is also former CEO, has 60% voting power. He is the sole holder of Class C shares, which have 70 votes each, compared to one for Class A stock that is available to the rest of us. Pincus can veto essentially anything.
The only known guru investor with a position in this popular name is Mario Gabelli, whose stake comprises 15,000 shares and truly a minuscule part of his portfolio. While retail investors generally are not trying to be activists, Pincus’ grip on the company may prevent important parties from taking large stakes. Thus, any benefits resulting from blocks of shares being acquired in order to bring about added oversight on corporate governance face obstacles.
Another concern is the recent departure of co-founder Justin Waldron. This loss of talent is the latest occurrence in what has resembled a steady stream of executives moving on. It is not easy to view this positively.
The company has prospects for gambling, but there is a complicated legal framework that it must operate within. Zynga Poker may become subject to gambling-related rules in the U.S. However, Real Money Games (RMG) in the UK, not U.S., may offer upside currently.
Plenty of things can happen that may result in the stock moving higher. There is an outperform rating on the company from Wedbush. An earnings surprise cannot be ruled out. Neither can a successful and wildly popular new game in the future. A short squeeze is not likely though, as Nasdaq.com reports the days required to cover as only one.
After reviewing everything, it seems sensible to wait and review what is disclosed at the upcoming earnings presentation. Financial strength alone does not obviously outweigh the many risks, and a lack of important presence might corroborate aversion to the company’s Class C share structure. While investors might do fine buying now, there is also the possibility of lower prices after Thursday.