Breakout

Zynga Trying to Stay Alive Until Online Gambling Is Legalized

Jeff Macke
Breakout

FarmVille creator Zynga (ZNGA) beat analyst expectations last night by reporting a profit of 1 cent per share. The Street was looking for a loss of 4 cents. Despite the minor triumph, the stock took a hit after-hours, at one point dropping more than 10% to under $3 a share. Investors were disappointed by a warning for the current quarter and a substantial drop in the number of people using its online games.

For casual investors the real shock was that anyone was still playing FarmVille or Words With Friends at all. It seems a triumph of persistence that Zynga still has 253 million monthly users, even if that number has dropped almost 25% since peaking in at 331 million in Q3 2012.

Jon Najarian, cofounder of optionMONSTER.com says the company is basically trying to stay alive long enough to get a piece of the online gambling business, which is slowly being legalized in the U.S. Though the company won't talk about it much, they did set up an online casino of sorts in the U.K. last quarter. As Najarian sees it, "That's the test tube for what they're going to do in the U.S."

Others might suggest that being one of a seemingly infinite number of online casinos in the U.K. demonstrates why Zynga may be striving to reach a mirage. Still there's hope for the bulls, which is more than can be said of growth for Zynga's existing products.

The reason Zynga has a shot at hanging around for awhile is the $1.65 billion in cash on the balance sheet. Better yet, ZNGA paid down long-term debt of $100 million this month. It's a glorious balance sheet, and the company seems determined to limit spending on non-gaming products for as long as possible.

Najarian sees an online game offering in the states as Zynga's only hope. "With gambling, I think they can survive. Without it they don't. It's a binary bet."

Most investors would be better off putting it all on red in Vegas.

For more from Najarian, check out details of The Street Monster investment conference coming this June.

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