Last quarter, Zynga‘s (NASDAQ:ZNGA) revenues fell significantly due to the lower number of monthly active users (MAU) and a decline in overall monetization. The company’s overall MAU stood at 253 million down from 292 million for the same quarter last year.  Even a sequential comparison showed a strong decline in these metrics as Zynga’s previously successful franchises lost users. The competition in the social gaming market has increased substantially and Zynga’s strained relation with Facebook isn’t helping.
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What can the company do now? Besides focusing on mid-core games, Zynga is banking on online gambling which can eventually turn out to be a big opportunity. Even a small share in this market could mean a significant upside (~30%) for Zynga’s stock.
What’s The Market Opportunity?
Zynga has a large opportunity in real money gaming. The company recently rolled out real-money games ZyngaPlusPoker and ZyngaPlusCasino in the U.K.  According to the management of Betable, a gambling platform, the online gambling market outside the U.S. is worth more than $32 billion.  Gambling research group H2 Gambling Capital estimates that the global online gambling market stood at 21.73 billion euros or 19 billion pounds in 2012.  The research firm further expects this market to grow by 30% over the course of next three years. While Zynga has already launched in Europe, it may want to expand to China later on. China’s online gambling market is expected to grow to close to $12 billion in 2013. This may not be surprising as Macau, which is a special administrative region of China, is already the biggest casino market in the world.
Due to lack of federal legislation, gambling is being introduced state-by-state in the U.S., and Zynga has already applied for operator license in Nevada.  The U.S. online gambling market can reach $7.4 billion in the next 4 to 5 years, and Zynga will strive to be one of the leading operators driving this growth.  However, the company will have to compete against popular gaming providers and casino operators who have significant mind share with gamers.
What Could Be The Impact?
Zynga can make a big difference to its business if it can tap this market successfully. It appears that global online gambling market could reach $40-45 billion in next five years, and even if Zynga can grab 1-2% share of this market, it could add additional $400-$900 million in revenues. This could translate into an upside of about 20-30% to our price estimate. However, the company will have to deal with the 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.
Our price estimate for Zynga stands at around $3.50, implying a slight premium to the market price.Notes:
- Zynga’s Quarterly Presentation [↩]
- Zynga Rises on Real-Money Gambling in U.K.: San Francisco Mover, Bloomberg, Apr 3 2012 [↩]
- Big Fish Casino Raises The Stakes On iPhone With Real-Money Gambling, TechCrunch, Aug 16 2012 [↩]
- Probability looks at U.S. alliances as online gambling gathers steam, Reuters, Apr 18 2013 [↩] [↩]
- Zynga’s Online Gaming Push Faces Hurdles From Casinos, Bloomberg, Apr 2 2013 [↩]