Zynga’s Stock In For a Long Drought?

Jul 29, 2012
J. Webster
Comments Off on Zynga’s Stock In For a Long Drought?

We’ve all heard that our corn crops are at an all time low due to droughts across the United States. Corn and many other food crops hit by the lack of rain will cause food prices to rise at the grocery store. Perhaps this shortage of food and increased prices in our real “Farmville” is why Zynga’s stock is collapsing – people are buying real food instead of virtual.

Could Zynga’s recent stock collapse be tied to the number of people in the United States receiving food stamp assistance from the government? According to a recent Bloomberg article, food stamp users hit an all time high of 46.5 million Americans this past December. This marked a .5% increase from the previous month and a 5.5% increase from the previous year in the same month.

Yet consumers have been addicted to social and mobile games as a sense of escape from the real world. Taking care of a virtual farm, city, zoo, or other place where users create based on their own ideas has become one of the biggest gaming sectors in the country. Social games count on users to pay fees for certain items that get them ahead in the game, like extra money, extra plants, extra land, and special animals. However, with a tight economy and people counting on every penny to pay for rising grocery costs, it’s no surprise to me that people are cutting down on spending money on virtual Zynga games.

For the second quarter, revenue was up 19% to $332 million at Zynga. Total bookings in the second quarter were $302 million, a 10% increase. Earnings per share came in at a loss of $0.03, versus break even in last year’s second quarter. Analysts had been hoping for $0.06 in earnings per share. Zynga will now likely fall short of analyst’s fiscal year target of $0.27 in earnings per share. In fact, Zynga’s new guidance calls for Non-GAAP earnings per share of $.04 to $0.09 from $1.15-$1.23 billion in bookings.

The positives from Zynga’s call were:

  • Launch of six new game in quarter two (Bubble Safari, Ruby Blast, The Ville, Zombie Swipeout, Zynga Slots, Matching With Friends)
  • Grew mobile footprint
  • Advertising revenue up 170%
  • Had seven of the top ten Facebook games (Daily active users as of 06/30/12)

The horrible part for Zynga is that it’s been reported that several insiders sold shares back in an April secondary offering. According to this Yahoo article, Zynga saw the following insider sales in April:

  • Marc Pincus (Chief Executive Officer) – 16.5 million shares, $200 million
  • Reid Hoffman – 688 thousand shares, $8.2 million
  • David Wehner (Chief Financial Officer) – 386 thousand shares, $4.6 million
  • John Schappert (Chief Operating Officer) – 322 thousand shares, $3.9 million
  • Reginald Davis (General Counsel) – 315 thousand shares, $3.8 million

Other sellers included Institutional Venture Partners, Union Square Ventures, Google, and Silver Lake Partners. In total, Zynga sold 43 million shares at $12 for $516 million. All of the sales sold were insider transactions. After the stock collapse, Zynga shares are now worth $137 million. Despite the sales, most of the sellers still have large stakes in the company, including CEO Pincus.

Zynga has been a publicly traded company less than a year. Shares are now down over 60% from their December 16th IPO price. Shares have traded as high as $15.91 since they went public. The earnings miss this quarter marked the first miss in the company’s relative short public history. Zynga previously beat estimated earnings per share by 20% and 67% in the previous two quarters.

Shares of Zynga now trade in the bargain bin and can be bought for the price of a bottle of ketchup, around $3 at today’s closing. When it comes to buying Zynga shares for the investment in fake food, or investing in food for families to eat, I’m guessing Zynga shares aren’t very popular right now, especially with a real drought looming. Tread cautiously with shares of social gamer Zynga.

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