Are the Glory Days Over for Zynga?

In the past, the video game industry has been dominated by console giants Nintendo, Sony Corp. (NYSE:SNE) and Microsoft Corp. (NASDAQ:MSFT). However, the mobile and social-media revolution is creating a new battleground.

Due to the rising popularity of smartphones and tablets, more companies than ever before are coming to the video game space. One of the most well-known newcomers is Zynga Inc. (NASDAQ:ZNGA). The company is behind Facebook (NASDAQ:FB) hits such as Words with Friends and CastleVille. Zynga went public last December at a price of $10 per share, but has since fallen by almost 50 percent. As competition heats up, doubts are surrounding how much Zynga can profit from its gamers.

Gree Inc. and DeNA Co. are two mobile gaming Japanese firms that are expanding their presence by acquisitions. In May, Gree purchased Funzio Inc., the maker of Modern War and Crime City, for $210 million. Meanwhile, DeNA has made several deals in the United States over the past few years. In 2010, the company bought Gameview Studios, which makes games for the Apple (NASDAQ:AAPL) and Android (NASDAQ:GOOG) platform. DeNA also purchased Ngmoco for $400 million, representing one of the highest amounts ever paid for an iPhone development firm. “There’s a land grab on with Gree, DeNA and Zynga going after the same turf,” said David Gibson, a Tokyo-based senior analyst at Macquarie Securities, according to the WSJ.

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Zynga has not been riding quietly into the night, but its acquisitions have left much to be desired. In March, the company purchased OMGPOP for $180 million, plus another $30 million in employee-retention payments. The Draw Something app placed OMGPOP on the map almost overnight as it captured millions of daily users. It is OMGPOP’s most popular game to date, but it is fading fast. The game peaked in daily active users at 14 million in March, and has declined to 9 million users as of May. Free mobile games often experience large spikes in users early in its life span and decline to a more stable level, but this looks to be a clear case of overpaying for a quick fix.

If Zynga hopes to stave off increasing competition, it will need to improve its monetization process. The WSJ explains, “ Zynga lags the Japanese companies in converting game players into paying customers. Gree generates $11.21 for every user who plays one of its games at least once a month, according to Macquarie Securities. The firm estimates that DeNA books $6.50 per month from its regular users. Zynga has 292 million regular users but generates just 33 cents per month from each.” The global mobile-game market is expected to grow from $3.77 billion in 2010 to $17.6 billion in 2015. Unless Zynga pumps out a steady stream of popular hits, it will suffer from its lack of in-gaming revenue creation.

Shares of Zynga have plummeted 46.6 percent year-to-date. However, some analysts still believe there is value to be had in the company. Ken Sena, an analyst at Evercore Partners, increased his rating on Zynga from Underweight to Equalweight. “We continue to have fundamental concerns with the business’s long-term growth sustainability,” Zena said in a note to clients. “However, on its current valuation, plus its new game releases, we view the risk-reward as more balanced.”

Zynga’s stock closed Thursday down 2 cents at $5.03 per share on 19.5 million shares traded.

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