Zynga's Online Gambling Plans Ready to Blossom

TheStreet.com

NEW YORK (TheStreet) -- Zynga's management needs to expand aggressively and strategically into real-money gambling now, or explain why they shouldn't be replaced by a team that can.

Zynga is best known for FarmVille and other -Ville games, but if you point your browser to its online poker destination, you'll find where the company is able to generate the profits shareholders want. If you don't think actual, real-money gambling is an essential component to the company's future, you're not paying attention.

ZNGA Chart

Zynga is licensed in the UK for real-money gambling, and according to the company's latest annual filing, Zynga Poker is the largest free-to-play online poker game in the world. In 2013, Zynga Poker was the top performer by revenue, generating 21% of total online game revenue. That's up from 19% in 2012.

The next best game was FarmVille 2 at 17%, which means Zynga Poker accounts for almost 25% more revenue than FarmVille 2. Zynga also generates revenue through advertising sales, but 2013 witnessed a decline of over $23 million compared to 2012.

Zynga's most-promising and proven revenue stream is poker-related. Why isn't management hot to expand on what's working instead of trying to reinvent the wheel? In July 2013, management decided to withdraw its application from the Nevada Gaming Control Board and focus on free games.

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(Photo courtesy of Zynga.)

The ace in the hole is that the free-game focus includes social casino offerings. Indeed, the company has since released an updated version of Zynga Poker, Hit it Rich! and the new casino-like slots game Riches of Olympus.

These games give me hope and drive my investment capital into the stock because they're perfect for list-building and product awareness. If I thought for a second the company wasn't actually focused on becoming more than a Yahoo! or King Digital competitor, I would sell in a heartbeat.

Previously, Zynga was overly subordinate to Facebook . Mobile is part of its strategy to stand on its own, but poker places the gamemaker on a level playing field in negotiations. When Facebook and Zynga announced an agreement enabling UK Facebook users to play real-money poker on Zynga through Facebook, it marked the first time Zynga was able to sit at the grown-ups table.

Facebook was taking a 30% cut right off the top for "freemium" (free for users to play, improved with virtual goods purchases) games, all users entered through the social media colossus. Facebook is more or less a means to advertise, and few companies spend that large of a proportion on marketing and have anything left over for shareholders. Obviously Zynga wasn't an exception.

Investors need to understand that complete shifts in strategy don't happen overnight. When I realized the potential Zynga was sitting on, I knew it could take a year or more to come to fruition. If you're a shareholder once again watching your shares decline in value, keep in mind that the bull trend remains firmly in place.

I included the monthly chart on page one to display the technical bull thesis. The pink line below the recent lows is a nine-period moving average. This enables investors to visualize where the stock is right now. The cyan-colored support trendlines along with the red supply resistance illustrate a solid bullish trend.

I use the monthly chart because I'm focused on investing in, not trading, this stock. Daily charts add too much noise and the minimum time period buy and hold investors should give weight to is the weekly chart, which is also bullish.

All shareholders need now is for Zynga management to do its job and expand the casino for the long line of people waiting to play.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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