Shares of Zynga (ZNGA) were rocked yesterday on news that the maker of games no one plays anymore would be laying off 18% of its work-force. The roughly 520 layoffs represents a 3.5x increase over the number of employees the company dumped last fall.
The increase in firings represent the closest thing to "growth" Zynga has managed to acheive in its life as a public company.
The positive case for ZNGA is that the company is biding time until it can score a windfall from the legalization of on-line wagering in the US. Based on Zynga's expansion into the UK, the company's revenue cut from Internet gambling is less promising than it seems. A company called Bwin is Zynga's partner in the UK.
Based on Bwin's website they are in the business of hosting, design, payments, and almost everything else having to do with setting up wagering websites for partners. In the states a Nevada based company called Ultimate Poker is already up and running in Nevada and is expecting big name competitors soon.
There's no compelling reason either Ultimate Poker or casino giants like MGM (MGM) would need Zynga's technical expertise, imprimatur, or customer data to expand into Internet wagering. It's well and good that online gaming will be huge, but that's not a real growth strategy for a $2 billion company.
Zynga's failure coupled with the huge rallies in game studio stocks signal the end of the idea that upstart niche game publishers would be the big winners in mobile gaming. At one point Zynga's market cap was greater than that of Electronic Arts (EA). Over the last 52-weeks EA's stock has risen 75% while shares of Zynga have been folded in half.
Larger market forces in the gaming industry may have accelerated Zynga's decline, but the company's lousy decision making didn't help. The following are but a taste of Zynga's curious decision making process:
- In March of last year Zynga spent nearly a quarter of a billion dollars on a "playful fantasy land" HQ in San Francisco. At the time that worked out to about $80,000 for every employee in the entire company and over $100,000 for every worker based in San Francisco.
- Also last March Zynga paid about $180 million for OMG Pop, makers of the then hot game "Draw Something." In the first 30 days after the acquisition the number of daily users of the game fell by 1/3 to 10 million. Six months later Zynga wrote the investment down by $85-$95 million. It'll likely be a 100% loss or more on the investment.
- On April 24th Zynga said it expected to lose between $26.5 and $36.5 million for the quarter. Yesterday the company bumped that range to between $29 and $39 million. Business is deteriorating faster than the company can keep track.
The biggest problem with the lay-offs is that they aren't large enough. Based on its financial metrics Zynga should be renting office space to house about 250 full-time employees.
If gambling is Zynga's future that's all the company should be doing. The stock seems to have buyers at $3 a share. Last month I suggested Zynga shareholders would be better off betting their life-savings on Red. For a trade the odds have improved, but as an investment Zynga is simply inching towards death.
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