Zynga (ZNGA) has laid down a strong foundation for 2014 with its results for the first quarter that topped Wall Street expectations. Also, the recent announcement of Mark Pincus, who would be resigning from the day-to-day operations, boosted investors' sentiment.
The main drivers behind its solid performance for the quarter were Farmville 2 and Zynga Poker, along with its shift towards mobile gaming. However, the company is faced stiff competition from Glu Mobile and Electronic Arts. Given this competition level, will Zynga's mobile moves lose momentum? Also, everything was not fine with Zynga's results because the company's revenue outlook was below consensus. So, should investors bet on Zynga? Let's find out.
Having registered strong results in the first quarter, Zynga remains quite optimistic about its outlook and is expected to post healthy results in the upcoming quarters. The gaming company is aggressively investing in marketing strategies and innovation to support its vision. It plans to launch many new games that should attract more gamers Zynga going forward.
Zynga is engaged in various initiatives so as to improve its net profit. The company has recently shifted its business toward mobile, as the growing popularity of smartphones and tablets are becoming drivers for its top line that should fetch better results in the upcoming quarters. Further, to strengthen the mobile platform, the video gaming company had purchased NaturalMotion in January for $527 million.
NaturalMotion, on the other hand, has a solid track record in mobile gaming. It is well-known for its racing games. Its top-selling games such as CSR Racing and Clumsy Ninja are performing well in the market and are being downloaded tens of millions of times on different app stores. Clumsy Ninja, for instance, hit 10 million downloads in the first week of its launch, becoming the number one free game in the Apple App store.
With a move such as this, Zynga has undeniably built a strong base for its mobile gaming segment that will certainly help the company deliver a great performance going forward. Also, NaturalMotion brings well-known intellectual properties to Zynga, apart from a talented team that has created such games that should further enhance its operation efficiency in the future.
Competitive threats ahead
Zynga might face stiff competition in the mobile gaming segment as both Glu Mobile (GLUU) and Electronic Arts (EA)have already built a strong base with several well-known games. Glu Mobile has several games such as Contract Killer, Frontline Commando, Eternity Warriors, and Deer Hunter that are gaining traction in the market and are driving its growth. Moreover, Glu Mobile has launched RoboCop and Motocross Meltdown that will boost its sales in the future.
Glu also has an advantage as it is expected to benefit from ongoing growth in action games that are driving its sales. The company points out that almost 45% of revenue on consoles was from the action and shooter genre in 2012. With the lines between mobile devices and consoles getting thinner, Glu is making the right move by going into action titles.
Electronic Arts has increased its chances of benefiting from the mobile gaming platform. As announced by Electronic Arts last year, it will launch 15 mobile games in the span of a year. Besides, EA has numerous popular titles on consoles and PCs such as FIFA 14, Battlefield 4, Madden NFL 25, Need for Speed Rivals, and NBA LIVE 14 on the mobile platform. Since these games are already popular, they will find a good number of takers on mobile as well and increase its chances of extending its market share in the segment.
Zynga's revenue was down a huge 36% year-over-year in the first quarter. Although there were a few good points, investors shouldn't get too excited yet. The company is displaying some good growth in mobile, but we should wait for a couple of quarters and see if Zynga is able to sustain its mobile success.