Everybody Hates Zynga

 | Jun 04, 2013 | 9:50 AM EDT  | Comments
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Zynga (ZNGA) is hated.

It's become a punch line, trading 70% below its initial offering price. At every new bit of bad news, critics run out and dance on the online game maker's gravestone.

Monday's news that the company would lay off 18% of its workforce provided more shouts of glee from Zynga bears. They pointed out, fairly, that an 18% reduction in headcount amounted to 520 people. And that the entire former OMGPOP office in New York was let go about a year after it was acquired by Zynga for $180 million, when it had one of the hottest games around, Draw Something.

The bears also said that Zynga announced another "disastrous" quarter. (In reality, Zynga said that its current quarter would come in at the bottom half of previous guidance.)

But there are many positives:

  • There's about $2.27 per share worth of cash and real estate holdings built into the stock. At Monday's $2.99 price, you're getting a great entry with a strong floor beneath it.
  • The headcount reductions translate into annual savings of $80 million per year.
  • High-revenue-potential games are coming in the second half, including Battlestone.
  • It only takes one hit for it to be massively profitable to Zynga's bottom line.
  • Sure, there are problems at the company, but that's why you're getting it basically for cash value.
  • If Zynga squeak out one hit this year, this stock could double.

There's no question that the rapid shift to mobile caught Zynga off guard; it had a high headcount and didn't see this playing out when it went public.

Does Zynga deserve to be in the penalty box because of those mistakes? Sure. But the bears have to recognize that this group has been able to deliver hits before, and the risk-reward setup for investors looks good.

If only one out of 10 new releases is a hit, Zynga's stock will be a home run.

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