Zynga (NASDAQ:ZNGA) is no longer the king of social gaming on Facebook (NASDAQ:FB), losing that position to King.com, which is seeing immense success with its game Candy Crush Saga. The company registered a steep decline in web bookings in the recent quarter due to the closure of certain underperforming games and surprising weakness in Texas Holdem Poker, one of its key game franchises. However the Farmville franchise is still doing well and Zynga is introducing its biggest gaming update ever, Appaloosa River. With this update, the company intends to add a much needed refresh to the game as users will be able to farm water crops and domesticate water animals/birds. The fickle nature of social gaming user base dictates that Zynga comes up with something new every once in a while to engage them, but this is where the company has lacked in the recent past.
Farmville and Farmville 2 constitute roughly 16% and 15% of Zynga’s online gaming revenues respectively.  Farmville 2 did well in the first half of the year and user statistics from appdata.com suggest that the game is going strong. For now, it averages close to 26 million monthly active users (MAU). Farmville and Farmville 2 grew their combined bookings by 29% in Q2 2013 compared to the same period a year ago.  However, this success could be temporary and Zynga needs something more permanent to pull itself out of its current situation.
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We believe that the company should focus on innovation and expanding mid-core games instead of copying competitors as alleged by some reports. The strategy of gradually building the user base rather than relying on explosive and unsustainable growth will pay off. The company has launched some mid-core games on mobile including War of the Fallen, Battlestone and Solstice Arena. Such games have a different growth trajectory and tend to build an audience over longer periods of time. In addition, the company’s long-term strategy of creating its own gaming ecosystem will protect it against the inherent volatility of individual social gaming titles. What Zynga needs is better games, innovation, more sustainable ways of monetizing games as well as higher focus on core gamers. New CEO Don Mattrick, can leverage his vast experience in building sustainable customer base for Xbox Live to offer fresh perspective and help the company in managing its costs better.
Our price estimate for Zynga stands at $3.40, implying a premium of about 20% to the market price.Notes: