I have been bearish on mobile gaming companies for quite some time. I have already urged investors to stay away from Glu Mobile (GLUU, Financial) and to short King Digital Entertainment (KING, Financial). Investors should sell Zynga (ZNGA, Financial).
Transition is difficult
The company is in transition phase as it is moving away from Facebook (FB, Financial) to independent games. While the mobile gaming industry is growing significantly, Zynga’s transition has been rough. The waning popularity of Zynga’s hit games, along with terrible execution on the company’s behalf, has made the transition process difficult.
Zynga’s Monthly Active Users and Daily Active Users have fallen consistently; as a result the share price has underperformed ever since Zynga went public. The company still hasn’t found good replacements for its previous hit titles, and consequently the stock price is not likely to move higher in the coming months.
Zynga’s product pipeline still looks weak, and things won't get better for the company going forward. Thus, due to terrible execution, Zynga is a sell for now.
No barrier to entry
The lack of entry barriers is another reason why no single company can dominate the mobile gaming industry. There are no considerable obstacles that prevent new competitors from easily entering the mobile gaming business.
Developing a hit mobile game doesn’t always require huge investments. There are hundreds of thousands of registered developers on both Android and Apple (AAPL, Financial), and this shows that the mobile gaming industry is fragmented.
Although proper marketing can help gain recognition in the initial stage, the long-term success of a game depends entirely on its concept. As a result, the competition in the industry has increased, and the sector has become fragmented. This also indicates that it will be impossible for any company, let alone Zynga, to dominate the space in the long term.
Conclusion
The awful execution of Zynga’s management has held back the company’s growth. Zynga’s product pipeline is still weak, which is why the stock will continue to underperform going forward. In addition, the mobile gaming industry has become very competitive and as of now Zynga has no chance of making a comeback. For these reasons the stock is a sell.
