Let the Games Begin

As Leo noted in this issue, big companies like Facebook are still fighting over the future of social media. But one corner of the online world that is being pioneered by smaller firms is the world of online, interactive gaming.

One of the most interesting, but volatile, companies in this field is the San Francisco-based Zynga (NSDQ: ZNGA). This company develops social games that work on mobile phone platforms such as Apple iOS and Android and on the Internet through its website, Zynga.com, as well as social networking websites such as Facebook and Google+. When the company was started in 2007 the founders said their mission was to “connect the world through games.”

Zynga launched what is considered its best-known game, FarmVille, on Facebook in June 2009, reaching 10 million daily active users in less than two months. The most recent numbers indicate that Zynga games have about 250 million monthly active users (MAU – an important indicator in the gaming business), and three of the top five Facebook games were Zynga titles: FarmVille 2, Texas Hold ‘Em Poker (now known as Zynga Poker), and ChefVille.

One of the company’s best-known offerings is Words with Friends, which brings Scrabble into the 21st century, without the necessity of all the players being in the same location.

At one point, almost 80 percent of Zynga’s customers were linking to it through Facebook. But the company’s relationship with Facebook ended March 31, 2013. Now it has the more daunting task of reaching out to new users on its own, in an industry that changes very quickly.

Zynga’s NaturalMotion, an Oxford-based mobile game and technology developer, is the creator of hit mobile games in popular entertainment categories, including CSR Racing, CSR Classics and Clumsy Ninja. Zynga games have been played by more than 1 billion people in 170 countries.

The stock’s price has fallen sharply in the last few weeks. First, several top executives at the firm announced that they were leaving. This is part of a strategy by CEO Don Mattrick to overhaul the company’s approach, particularly by emphasizing more mobile games.

One publication that follows the industry reported that “some of the executives who left did so on their own as they sought out new positions. Mattrick asked others to leave, and still others were reassigned to some completely different roles.”

Then Mattrick spoke at an investment conference focused on Internet stocks. He gave an impressive presentation about the company’s past successes and future prospects, but some market analysts had been hoping for more specifics about the company’s near-term profitability (earnings per share are slightly negative right now).

As for the new blood, Zynga has hired Alex Garden as President of Zynga Studios. Garden brings 25 years of gaming experience, and a history of architecting consumer entertainment experiences across free-to-play and console gaming. Garden came from Microsoft having served in a number of leadership roles including General Manager of Xbox LIVE and Xbox Music. In these roles, he helped Xbox scale to 41 countries and tens of millions of subscribers with a world-class content library from partners like HBO, Netflix and ESPN.

Zynga has a market cap of around $2.7 billion; the company went public at the end of 2011. It is currently trading toward the bottom of its 52-week trading range (2.50-5.89).

Some market-watchers are concerned that big companies like Google and Apple might try to preempt this field themselves, crowding out smaller competitors like Zynga. But the gaming world requires a very specific kind of creativity, and Zynga has demonstrated a track record in this area that the other companies have not.

The bottom line is that Zynga still has a dominant position in the social and gaming sector, and while it has posted some bad news this year, investors seem to have overreacted to it. Zynga is a buy below 4.