Zynga’s Steady Decline in Stock Price

According to recent data, social online gaming appears to be slowing down. Not only is user engagement dropping, but the money spent on these games is also decreasing. A survey by researcher Frank N. Magid Associates revealed that on average players planned to spend $51 on games this year, compared with $78 last year.  The growth of online social games has slowed considerably, with 38% of social media users now playing games on the networks, compared with 36% a year ago. Another report on Facebook by IHS iSuppli said that last year, Facebook saw a significant decline in the number of Facebook gamers. In 2010, half of Facebook’s monthly active users were gamers, and that number fell to 25% by 2011. Online gaming developer Zynga is already feeling the heat.

Zynga’s Financials

Zynga’s (Nasdaq:ZNGA) Q2 revenues grew 19% over the year to $332 million with non GAP EPS of$0.01. The performance was significantly short of market projections of $343 million in revenues, with earnings of $0.06 per share.

Revenue performance raised concern given the slower growth of the company’s core gaming business. Online game revenues grew 10% over the year to $291.5 million. Advertising revenues grew 170% to $40.9 million. During the quarter, Zynga reported average bookings per user of $0.046. Daily active users grew 23% to 72 million and monthly active users grew 34% to 306 million. Zynga attributed the weak performance to game-launch delays and lower expectations for the “Draw Something” game it acquired through the purchase of OMGPop earlier this year.

These conditions also drove Zynga to lower its outlook for the year.  Full-year bookings are now projected to be between $1.15 billion and $1.23 billion with earnings of $0.04-$0.09 per share. A quarter ago, Zynga had projected earnings of $0.23-$0.29. The market was looking for EPS of $0.27 for the year.

Zynga’s Facebook Worries

Zynga is paying a heavy price for its heavy dependence on Facebook’s platform. Recently, Facebook modified its algorithms for surfacing, which impacted player engagement. Per the new algorithm, Facebook is promoting users to discover new games instead of the existing ones that users were playing. The news feeds that showed posts promoting a game and invitations sent to friends are no longer as prevalent as they were earlier.

The change led to playing hours for all existing games falling by 15% across the platform, and game play on live-action genre games falling 34%. Lower user engagement also hurt virtual good sales on the Facebook platform.

Zynga’s Growth Options

Some analysts also believe that Facebook’s platform change is just another factor in Zynga’s weak performance, and that the company’s troubles lie deeper. They claim that the shift in gaming from PC-based social gaming to mobile gaming is hurting engagement for their games. To address this shift, Zynga needs to stress capturing the mobile device gaming market.

Zynga’s mobile daily active user base has grown more than five times to 33 million. Zynga estimates that 21% of its mobile player base plays its web games. However, like Facebook, Zynga suffers from weak monetization on mobile devices. While they did not give details, statistics show that mobile average bookings per user (ABPU) are nearly half that of the web ABPU.

Zynga is also exploring the option of real money gaming through games like Zynga Poker. Zynga Poker has more than 35 million active users. The company is working to get licenses for launch of its first real money gaming offerings by early next year. Zynga will focus on the international markets for gambling because the U.S. lacks an open regulated online gambling environment.

Zynga’s stock has fallen to lows of $2.81, with a market capitalization of $2.13 billion. The stock price has dropped more than 82% since it touched a high of $15.91 soon after listing nearly nine months ago.