Zynga (NASDAQ:ZNGA) will report its earnings for Q4 2012 on February 5. While it is still the largest social gaming company in the world with over 300 million monthly active users, it recently lost its top spot on Facebook to King.com’s Candy Crush Saga. The company’s poker prowess is significant and is already dominating the smartphone market. Zynga’s poker app was named the top grossing iPhone app for 2012, by Apple Inc in the U.S. and the U.K. This is no small feat as the game has been around for two years and is still attracting a large number of users, which bodes well for Zynga’s real-money gaming initiative. 
Real-money gaming is Zynga’s biggest bet in the short term, and the company has started work on its U.K. gambling initiative ZyngaPlusCasino. The website currently just has a preview page but will soon feature games such as Blackjack, Roulette, Baccarat, Video Slots and more. This initiative is currently open only for U.K. residents of 18 years and above. 
We are highlighting some key trends driving its business below.
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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).
We expect some upside to the stock based on the following:
(1) Zynga Will Roll Out Real-Money Games In The U.S. And U.K.
While Zynga waits for the gaming license in the US, it will roll out real-money games in other countries like the U.K. It has already entered into an agreement with bwin.party to launch real-money gaming for its U.K. customers. It also plans to launch a real-money version of Texas Hold’em Poker and FarmVille themed slots in the country. And once the company manages to rope in a Nevada partner, the regulated online gaming space in the U.S. will be easier to penetrate.
(2) Monetizing Mobile Is Easier With Real-Money Games
The biggest hurdle faced by most app developers is the inability to monetize mobile apps. Most mobile games are free-to-play and monetization is mainly through ads. This is not ideal, as ads tend to be intrusive to the gaming experience. Only top games such as Rovio’s Angry Birds can successfully monetize through paid versions of the game, and this is not ideal for Zynga as its games are free-to-play. While the company monetizes via ads and in-game purchases on Facebook, the introduction of mobile-based real-money games provides a much better avenue for monetization of the mobile app, as the company can make games free and charge a fee for real-money gaming features.
(3) 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. Also, hiring experienced real-money gaming executive, Maytal Ginzburg, as CEO, seems to be a move to tap the real-money gaming market. The company recently started lobbying in Washington and California for legalization of online gaming in the U.S., and its best chance to succeed is if the law comes through. 
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, but the licenses only allow the companies to provide systems and services to casinos, and not yet to offer games online. If Zynga 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))
We have a $3.20 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: