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Zynga Gets Crushed and Facebook Feels Its Pain Before Earnings

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It's anything but fun and games for Zynga (ZNGA) Thursday as the stock continues its steep plunge following Wednesday's dismal 2Q earnings. The report badly missed Wall Street expectations and provided a dramatically lowered outlook amid delays in new game releases, a rocky shift to mobile, a disappointing performance for current game offerings such as "Draw Something" and less play from Facebook's massive audience given recent interface changes.


This afternoon Zynga's shares are trading at an all-time low of around $3.13 on volume as high as 1.3 million; this is close to a 40% drop since yesterday and around 70% below the company's December IPO price of $10 per share.

Following the dismal report and outlook, several brokerages -- from Morgan Stanley to Goldman to Citigroup and Lazard -- have slashed their ratings and price targets on the company. One previously bullish Zynga analyst, Richard Greenfield of BTIG, even expressed embarrassment after removing his seemingly way-too-optimistic $13 price target on the company.

Even some brighter news from the report -- that Zynga had increased its number of players -- was dismissed as a result of its recent acquisition of OMGPop (the creator of the underperforming "Draw Something"), which means expenses also jumped.

Not all analyst talk on Zynga is entirely negative. Wedbush Securities analyst Michael Pachter, while deeply slashing his price target on the stock, did note that the company "is profitable and has tremendous brand equity, suggesting that there is upside to the share price."

Waning Interest in Games

On Wednesday's earnings call, CFO David Wehner cited a disappointing performance in existing games as being the major factor for its lousy outlook, which could signify an overall social networking game fatigue. And perhaps folks just aren't as interested in spending real money on virtual game tokens and Farmville animals as they once were; while Zynga games are always free to play at a basic level, many of them offer perks and features that you have to dig into your wallet for.

Yahoo! Finance colleague Henry Blodget notes today that, back in April when the company had a secondary offering, many insiders -- who unloaded a total of 43 million shares at $12 a share -- got out at just the right time. Indeed that seems to be the case, at least for now.

Zynga's skid isn't helping Facebook's (FB) stock ahead of its first earnings report since its infamous, glitch-heavy IPO on the Nasdaq in May; shares are down around 5% as investors consider the effect Zynga's slide could have on FB. The stock is trading at $27 and change, far below its IPO price of $38, which it hasn't touched since that first day of trade. Last year Zynga's games made up more than 1/10th of Facebook's total revenue.  In Q1 2012, Zynga made up 15% of Facebook's total revenue. Facebook makes this cash from a mix of advertising and a percentage of dollars spent on the game tokens and other features.

Monetizing the User Base

Facebook is arguably the most highly anticipated earnings report of the week, although already reduced expectations may lead to a lack of any real downside surprise on earnings and revenue. A FactSet poll says analysts are, on average, looking for earnings of 12 cents per share on revenue of $1.16 billion. Analyst Zachary Karabell told Breakout that, this time, it's not about EPS but about the user base, which is close to 1 billion, and how to profit from it. "You look at how much they're monetizing their billion plus Facebook users," he says, "and to what degree they are or not will determine the fate of that particular company." Mobile monetization has been a particular challenge for the company, so investors will likely be looking for a solid plan around it.

Meanwhile, today's Y! Finance poll asks the question: Where will Facebook's stock stand one year after listing? An overwhelming 84% of respondents so far have predicted the stock will stand at less than the $38 IPO price. 11% see it as being above the IPO price, while 5% see it holding steady.

What do you think? Will Facebook's earnings disappoint? Do you see the stock up or down on its one-year anniversary?