Zynga's Going to Have its Day

 | Aug 09, 2013 | 5:30 AM EDT
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Last night, I was watching CNBC's "Fast Money" and one of my favorite panelists, Dan Nathan, outlined a "contrarian trade." He advocated buying Zynga (ZNGA) here with its price below $3, with the idea that you could probably expect a double in a year.

Dan's logic is that in buying this stock now, you can rely on the fact that it's got a large cash pile to protect you on the downside while you wait for them to get it right on the upside. Plus, they've got new CEO Don Mattrick, who's likely cracking heads to get things moving on the inside of Zynga.

I completely agree with Dan, which is why I own it long and have been vocal about it here.

You are protected on the downside with Zynga's existing cash as well as its ownership of its corporate headquarters in San Francisco. You can also take comfort in the fact that this cash pile from its IPO a couple of years ago hasn't really dwindled. In other words, they haven't been losing money, so you can count on the cash.

But it's also important to recognize that it's possible the company could start dipping into that cash if it continues dropping daily active users the way it has in the first six months of this year.

The daily active users once seem infallibly high for Zynga. But this is a company that is in desperate search for a hit, any hit.

If the daily actives keep dropping at a similar recent pace, this company will start to bleed cash. So you need to be aware of it.

But the flipside is, imagine what will happen to the stock if it actually starts to grow its daily actives again?

Look at the reacceleration of growth at Facebook (FB) a few weeks ago and just continued growth at Groupon (GRPN) this week. Both of those stocks got richly pumped up on that good news.

On one hit game -- just one -- and Zynga's shares will likely rocket. It would likely be much more than just a double.

Dan is absolutely right that, if your timeframe is a year out, that's a pretty good bet (with odds in your favor) that they're going to be able to come up with at least one hit in that time.

But even with the new CEO, there are no guarantees of a hit suddenly coming down from on high. He's going to be dealing with what's already in the pipeline. If he's lucky, he'll see something he can push forward. If not, he's going to have to start from scratch.

But one thing is clear. Amid all the buzz of the last two weeks with social media and mobile stocks, Zynga's stock has definitely not participated. So, this is probably a good entry point position if you're thinking long term.

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