Zynga‘s (NASDAQ:ZNGA) stock shot up at the end of January 2014 after the company released its fourth quarter results. It appears that it wasn’t an impulse buy from investors as the uptrend continued throughout the next month. And now, the company’s shares saw another moderate jump following management’s statements at a recent Morgan Stanley conference. Zynga’s CEO mentioned the plans of revamping of the company’s key gaming franchises for mobile. And in response to an analyst’s question, he made it clear that Zynga remains committed to leveraging the potential of real money gaming, albeit in specific markets.
While this is a positive news for investors, Zynga needs to ensure that its franchise reboot and future efforts are directed towards tapping the mobile market opportunity. Mobile is extremely important as the percentage of time spent by consumers on this platform is continuously growing. Smartphone sales have surged in recent years and are expected to surpass 2 billion over the course of next six to seven years. Candy Crush is currently the most popular mobile game with more than 400 million monthly active users, and almost 70% of the bookings that King generates through this game come from mobile platform. There is no denying that Zynga can not turn around its business without booking success on mobile platform.
Zynga Is Behind Others In Mobile
If we look at successful Internet companies which command a steep valuation in the market, the one thing that’s common among them is that they have figured out better than others how to conduct their business on mobile. These companies include Twitter (NASDAQ:TWTR), Facebook (NASDAQ:FB) and LinkedIn (NASDAQ:LNKD). The argument is strengthened by the fact that it was only after Facebook started ramping up its mobile ad business that its market price shot up from $19 to close to $70. The same thing happened for Internet radio company Pandora Media (NYSE:P), which was struggling until it started selling its mobile ad inventory by ramping up its sales force and targeting local radio markets. Around 70%-80% of monthly active users are using the services offered by these companies on their smartphones and tablets. This clearly showcases that an Internet-based business can not survive without strong presence on mobile, and this is where Zynga has yet to prove itself.
Zynga was doing fairly well until the social gaming space was primarily reliant on Facebook, and has suffered since its relationship with Facebook weakened and the latter started promoting other gaming companies. The mobile platform accounted for only 38% of Zynga’s monthly active users in Q4 2013, and only 35% of total bookings. That’s in stark contrast with the performance of competitors such as King. 
Opportunity In Real Money Gaming
In his last response of the session, Zynga’s CEO indicated in “relation to real money gaming, . . . we have shared that we will be doing pilots in different geos [sic] in the world.” ((as quoted from Seeking Alpha)) Indeed, this varies little from their statement last July that, while they would “evaluate” real gaming products in the UK, they would not pursue a license for this purpose in the US. ((as stated in the July Earnings Release)) Gambling, online or otherwise, is not everyone’s cup of tea, surely. But their is great promise in real money gaming and the potential for robust and recurring revenue is too great to ignore. An adroit entry into this market could reward investors without interfering with its core gaming franchises.
Yes, Zynga has a large opportunity in real money gaming if it doesn’t give up and executes well. 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% between 2012 and 2015.
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.Notes:
- Zynga’s SEC filings [↩]
- 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 [↩]