Zynga’s Earnings Woes Pile Up With Investor Lawsuit

August 1st, 2012 by Trefis Team
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Zynga (NASDAQ:ZNGA) reported lackluster Q2 2012 revenue growth, a larger-than-expected loss, and lower outlook for Q3 2012. It is now being sued by an investor who is alleging that the shareholders were misled about the company’s financial situation. In a securities fraud lawsuit, investor Mark DeStefano has claimed that the company did not provide any information on the decline in users and the delays in releasing new games while declaring an expected revenue booking of ~$1.45 billion for 2012. [1]

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The lawsuit seeks approval as a class action lawsuit, representing the investors who purchased Zynga shares from February 28 to July 25. The damages sought were not specified. According to the complaint, the company insiders sold shares worth $500 million in a secondary stock offering in April after the stock rose to $15.91 in March from $13.49 in February. When the company posted Q2 earnings on July 25, it disclosed delays in releasing games and lowered its full-year outlook. Shares then fell 40 percent to $2.97, causing investor losses, DeStefano claimed.

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New games continue to be the driving force; focus on mobile

Zynga launched three web-based games and three mobile games in Q2 and most of them have seen moderate success. In the last couple of quarters, older games have lost users at a much higher rate than before, making Zynga’s new user growth ever more dependent on its new games. The company stated that this was due to Facebook‘s (NASDAQ:FB) changes favoring new games over old games.

As competition in the space increases, Zynga will be hard-pressed to continue to launch new games that are successful in order to maintain revenue growth.

We have a revised $6 Trefis price estimate for Zynga, which stands well above its market price. We expect Zynga’s new platform and gaming network and online gambling initiatives to account for much of its future earnings potential.

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Notes:
  1. Zynga Sued Over Alleged Misleading Financial Statements, www.businessweek.com, 31 July 2012 [↩]