Zynga’s Online Gamble

A report by Lazard Capital released last year expects the social gaming market to be worth $9 billion by 2015. The social gaming market has seen growth through the increased adoption of social networking sites, such as Facebook. The report suggests that nearly 41% of the U.S. Internet-using population accesses social games through these networking sites.

Zynga’s Financials

Zynga’s (Nasdaq:ZNGA) Q4 revenues managed to beat market expectations. Revenues for the quarter were flat over the year at $311.2 million, surpassing market expectations of $248.6 million. Advertising revenues grew 35% over the year to $37 million as Zynga added several new brands and renewed advertising contracts with existing clients. Online game revenues fell 3% over the year to $274 million as bookings dropped 15% to $261.3 million.

As part of their ongoing cost control initiatives, Zynga recently announced the consolidation of work offices and more layoffs. Despite the measures, they ended the quarter with a loss of $0.01 per share. The loss was significantly lower than the market’s projected loss of $0.03 per share.

Among other operating metrics, the number of daily active users grew 3% to 56 million, and monthly active users grew 24% to 298 million. Zynga released six new games during the quarter, of which four were web based and three mobile based games. Mobile usage for their games is on the rise. Last quarter, Zynga reported 72 million players using mobile devices. Mobile bookings also grew 8% over the year. Unfortunately, though, Facebook still accounts for 79% of total bookings. Zynga is counting on this dependence to diminish as they increase their mobile footprint.

For the current quarter, Zynga expects revenues of $255 million-$265 million with non-GAAP loss per share of $0.05-$0.04 per share.

Zynga Expands Into Online Gambling

Zynga is counting on online gambling to help them grow in both domestic and international markets. Last quarter, they entered into an agreement with bwin.party with the goal of entering the real money gambling market in the UK. Recently, a few states in the U.S., including Nevada and New Jersey, legalized online gambling, thus paving the way for Zynga to develop online social gaming versions of real money games. Gambling is a big industry that is valued at $417 billion worldwide. The U.S. gambling market commands nearly a quarter of the global gambling market. Of this, at present, only a 3.3% share is held by online gambling. Surely, there is huge potential for growth. Zynga plans to launch their first real money gaming product by the end of the current quarter. They have also filed for a license for gambling services in Nevada.

Their stock is trading at $3.62 with a market capitalization of $2.84 billion. It touched a high of $14.48 in March 2012. The market is abuzz with talks that Zynga may be a potential acquisition target for the Internet giant, Yahoo. According to news, Yahoo is eying “two large acquisitions.” But Yahoo has not clarified what those targets are. Analysts believe that Zynga may be one of these because the acquisition would help Yahoo expand their presence in the social and mobile space. Zynga has remained silent on any such possibilities.

For what it’s worth, I think it’s a terrible idea.