Zynga (NASDAQ:ZNGA) will report its earnings for Q3 2012 on October 24. The company has already released certain preliminary results for the third quarter and expects revenues between $300 million and $305 million with bookings in the range of $250-$255 million. This is a revised guidance and puts earnings much lower than previously expected, and the company expects a net loss in the range of $90-$105 million and adjusted EBITDA between $10 million and $15 million.
Zynga is still the largest social gaming company in the world with over 30o million monthly active users and generates most of its revenue from in-game virtual goods sales and advertising on multiple platforms like Facebook, Google+, iOS, Android and others. Zynga competes primarily with Electronic Arts (NASDAQ:EA), Playdom which was recently acquired by Disney (NYSE:DIS) and other independent social gaming studios.
Below we highlight some of the key developments in the previous quarter and what to expect from the company in the near future.
The preliminary results reflect the weakness of certain games and include an estimated impairment charge between $85 million and $95 million related to intangible assets acquired in connection with the purchase of game maker OMGPOP.
The company’s updated full year outlook includes bookings in the range of $1.08-$1.10 billion (compared to prior guidance of $1.15 – $1.22 billion) and adjusted EBITDA in the range of $147-$162 million (compared to prior guidance of $180 -$250 million).
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We expect some upside to the stock based on the following:
(1) Zynga Has About $2.10 of Cash Per Share (account for 85%+ of its value currently)
According to its SEC filings, Zynga has cash and marketable securities net of debt worth $1.57 billion and has about 760 million shares outstanding, which gives a per share value of about $2.10. This means nearly 85%+ of the stock’s value can be explained by the company’s cash on hand, and all its games, trademarks, contracts, intellectual property and users are being currently valued at about 15% of the stock price. Unless Zynga is cash flow negative for a long time, we expect this will be used to grow the company meaningfully.
(2) Success Dependent on New And Future Games
Zynga has been facing stiff competition recently, but it still has the most number of users and has the best track record so far in terms of successful games. With its foray into serious games with the acquisition of A Bit Lucky and extending into real money gaming with online gambling, we expect these segments to provide some upside to the stock. The market currently values new and future games at near zero values due to high failure rates of new games. We currently estimate that new and future games account for about 25% of the $3.30 per share Trefis price estimate for Zynga’s stock.
(3) Mobile Gaming Opportunity
To leverage the huge feature phone user base, popular games such as Draw Something and Zynga Poker will now be available on the Nokia Asha Touch feature phones along with the rest of the Nokia Series 40 range. Nokia is still a top player in feature phones in emerging markets and hopes to extend this lead with touch-based feature phones. The games will be made available on a freemium model with free play and the option to purchase in-game credits. These are the first of its games to make its way to Nokia feature devices and will potentially drive more people to its Asha devices. These games will be added to the games already available on Nokia’s Asha Touch devices from publishers like EA, Gameloft, Rovio, and NAMCO BANDAI. This deal is an extension of the Lumia deal to bring Draw Something and Words with Friends to the smartphone range. 
(4) Online Gambling Opportunity
The online gambling market outside the U.S. is worth $32 billion and Zynga Poker is the world’s largest social poker game which attracts users despite the fact that there is no pay-off. Hiring Maytal Ginzburg seems to be a move to tap the real money gaming market. The company recently started lobbying in Washington and California and its best chance to succeed is if online gaming becomes legal in the U.S. 
The company will have to deal with competition from gaming incumbents such as Caesars Entertainment, which already operates online gambling services in Europe and has bought social and mobile game maker Playtika. Bally Technologies and International Game Technology were granted online gaming licenses in the U.S. The licenses only allow the companies to provide systems and services to casinos and not yet to offer games online; however, it is a step closer to online gambling. Bally will now offer its iGaming platform to casinos and IGT, its poker product to operators. If it enters online gambling, it goes up against popular gaming providers and casino operators who have significant mind share with gamers, and so it will be harder for it to gain a foothold in the market. ((Zynga Doubles Down On Online Gaming, www.fool.com, Set 4, 2012))
(5) Zynga Platform Initiative
Earlier this year, it launched its own gaming platform and cloud infrastructure — the Zynga Platform — in a bid to reduce dependence on Facebook and generate additional revenue by hosting and marketing games by other developers. It has already started marketing games by other studios and could become the default cloud gaming platform, thanks to the scalability and immense marketing reach it offers.
We have a $3.30Trefis price estimate for Zynga, which stands 30% 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.Notes: