Is Zynga’s Stock Still a Sell After Earnings?

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With shares of Zynga (NASDAQ:ZNGA) now trading at around $2.40, is the social gaming company a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Zynga saw an after-hours stock surge on Wednesday after its quarterly earnings report beat Wall Street expectations and revenue grew 3 percent from a year ago. However, the company still lost money, entering a loss of $52.7 million in the quarter, and admitted to users dropping off. A day earlier, it had quietly cut 5 percent of its full staff, shuttered several of its studios around the world, and closed 13 games. Zynga also lowered its outlook for the current fiscal year after games such as the The Ville didn’t do as well as expected. It has also recently been given no love from Facebook (NASDAQ:FB), a platform that Zynga was built on but which recently changed it algorithm, a move that the gaming company says has lowered user engagement.

On Wednesday, it also announced a partnership with bwin.party, a gaming operator that uses real money, in the hopes of entering real money casino games like poker, slots, and roulette.

H = High Quality Pipeline is Questionable

Exactly as in the case of Facebook, the key for Zynga is to translate its success on PCs to the mobile platform. While chief executive Mark Pincus stressed on Wednesday that it currently owned three of the top five mobile games and was reaching about 30 percent of mobile users, the company’s future success depends on how it unlocks the mobile potential. Zynga said it expects to launch two web games a quarter and four mobile games a quarter.

It also announced Zynga with Friends, a cross-platform social gaming service, last quarter in an attempt to lower its dependence on Facebook and is rumored to be creating an advertising platform to generate revenue and attract third-party developers. Ads already represent 12 percent of the company’s revenue and it began inserting sponsored content into games like Words With Friends and FarmVille recently.

T = Technicals on the Stock Chart are Not Strong

As of October 24, 2012, the stock price is 16.72 percent below its 20Day Simple Moving Average; 24.86 percent below the 50 Day SMA, and 70.77 percent below the 200 Day SMA. Since the beginning of 2012, the stock price has been in a downward trend and is down 77.36 percent year-to-date and down 77.58 percent year-over-year.

E = Earnings Are Decreasing Quarter over Quarter

Zynga’s earnings have fallen off over the last few quarters, and the most recent quarterly loss of 7 cents a share showed a big decline from the previous quarter’s earnings of about a penny a share and that from a year ago, when it broke even as a still-private entity.

Since earnings are not increasing quarter-over-quarter, the stock is too high for our risk profile.

E = Excellent Relative Performance to Peers? Not Exactly

Many investors favor Return on Equity as a key metric to how well the company is operating. Zynga’s operational performance is much worse compared with peer companies. Zynga has an ROE of negative 40.52 percent while rival Electronic Arts (NASDAQ:EA) comes in at 2.11 percent and Activision Blizzard (NASDAQ:ATVI) has an ROE of 7.76 percent.

Operating margins are also critical for stock evaluation. Zynga struggles with a margin of negative 45.69 percent compared to 1.20 percent for Electronic Arts and 21.40 percent for Activision Blizzard.

Conclusion

Zynga had gotten off to a flier with its IPO last December, but has quickly lost its footing and fallen very hard, with shares down nearly 77 percent since then. There is no quick fix for the company, which has lost the loyalty of users, love of friend Facebook, and the fith of investors. “The Zynga model was flaky to begin with,” Sterne Agee analyst Arvind Bhatia told The New York Times, noting that the company was heavily dependent on Facebook, a few hit games, and a few players willing to buy virtual goods. “If they could find a hit, maybe things could turn around. But the recent track record doesn’t give you a lot of confidence.”

Zynga looks like it’s a STAY AWAY based on the key metrics above.

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