Zynga Just Needs a Hit

 | Jun 06, 2013 | 9:40 AM EDT
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With Zynga's (ZNGA) recent woes, it has become popular to complain about how fleeting the gaming businesses can be.

Over and over, we hear that Zynga is a hits-based business. It's always said as a negative, meaning that you can't really rely on steady revenue in the future.

Don't you wish that more people had said that back when Zynga was going public 18 months ago? No one did because Zynga was on a roll of churning out a series of popular games that always got lapped up by Facebook (FB) users.

At a rich valuation, such as Zynga had back then, the hits-based nature of its business was a risk. But now it's an opportunity.

As Kara Swisher pointed out earlier in the week, Zynga's got $1.6 billion of cash. What she didn't point out was that it also owns its headquarters, which is worth another $350 million.

The bottom line is that Zynga's closing price yesterday of $2.87 a share is only slightly above its cash and real estate asset value of $2.27 a share. This means the core gaming business is worth next to nothing.

The company has certainly yet to produce a recent big hit like King's Candy Crush. But the hits-based nature of its business means that it only takes one game (out of a slate of at least a dozen annually) to hit to make an enormous difference to Zynga's valuation.

If you want an example, look at GungHo Entertainment, which trades in Japan on the JASDAQ. It came out with the popular Puzzles & Dragons game about eight months ago. It hit. Revenue multiplied along with its stock, which went up about 100 times over a seven-month period. One hundred times!

Obviously not every gaming company reacts like that and not every hit game is like Puzzles and Dragons. But one hit can have a huge impact on a small stock that has no expectations built into it.

That's good news for Zynga, although it's not clear when the next hit will arrive.

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