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Analysts warn that Zynga may not find a path back to profitability
Analysts warn that Zynga may not find a path back to profitability
October 5, 2012 | By Mike Rose

October 5, 2012 | By Mike Rose
More: Social/Online, Smartphone/Tablet, Business/Marketing

Following another disappointing financial quarter for social game behemoth Zynga, analysts have chimed in on the company's prospects, noting that Zynga's transition to mobile games has been "more painful than expected."

Colin Sebastian at Baird Equity Research has downgraded Zynga to "Neutral", stating that "it is clear that Zynga will not be able to counterbalance social gaming headwinds this year with its success in mobile and its broader network buildout."

He believes that Zynga's platform transition will now extend into 2013, meaning that ongoing realignment of resources, along with alterations to the company's products in development, is very necessary.

Sebastian had previously stated that his target price for Zynga shares was $6 -- he has now lowered that to $3, noting that while there is "limited downside from here" for the company, there are still far too many risks involved, including Zynga's reliance on Facebook.

Macquarie Securities analyst Ben Schacter isn't so positive. He notes, "we don't see a floor on the horizon. Our concern has been and remains that while Zynga executed against its first mover advantage on the Facebook platform, off of the platform they are just one of many."

Zynga no longer has an advantage over any other developer, he says, and as more and more users continue to move from Facebook gaming to mobile gaming, Zynga will continue to struggle.

He warned investors against "bottom fishing" until there is actually proof that Zynga has a way back to profitability -- although he added that Macquarie is continuing to reiterate its Neutral rating for Zynga.

Michael Pachter, meanwhile, has lowered his target price estimate from $7 a share to $4, and his full year estimates for the company from $1.4 billion to $1.2 billion -- however, he is maintaining an Outperform rating regardless.

"While we would normally be inclined to downgrade the company’s shares due to a more difficult outlook," he adds, "we believe there is significant upside, so we concluded that only a price target revision is warranted."

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Lex Allen
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I swear. I don't understand why everybody is moving to mobile when everyone in mobile is falling flat on their faces. Is there really money to be made here?

Steve Fulton
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I feel your sentiment. Every day.

James Hofmann
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I don't think there is. Too many bottlenecks in reaching new users - although there are a lot of phone users, we aren't seeing a lot of "long tail" in them. The big companies are buying their users, and at high rates. That makes mobile better suited as a "tie-in" platform for most, not your main event.

As the article mentions, this is an abandonment of Zynga's old strength - exploitation of Facebook for user acquisition. Nobody is expecting them to come up with a disruptive new way of competing in mobile, and they don't have the retention to grow their own portal on the Web.

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This user violated Gamasutra’s Comment Guidelines and has been banned.

Alan Rimkeit
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Bubble says "POP".

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I smell layoffs.

Thomas Roy
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Zynga excels at copying innovative games, polishing them, and "Zyngafying" them. I think the lack of significant innovation in facebook gaming is what hurt Zynga the most.

I doubt they can compete in an already saturated, copycat, mobile gaming environment.

Michael Joseph
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As we all know making games is hard and investing in any game company is very risky.

One take away is that no matter how much people think they've got things figured out, no matter how many short term tricks are broken out to extract money from users in the end the only thing that could be remotely considered a reliable path to long term success is making good games with good gameplay and in doing so strengthen your reputation and grow a loyal customer base.

Trust and reputation are important for customers. No company can afford to lose those things.

Zynga doesn't seem to care about that. And as incredible as that sounds, it makes sense as to why that might be when your business model revolves around exploiting player psychology. I don't know how people inside the company can ever maintain a respect their users with this sort of modus operandi.

David Fried
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Mobile has huge potential, but the majority of these companies are piling on ports and half-baked control schemes that just make gameplay miserable. Everytime I see a virtual touch pad I want to slap a developer on the nose and scream: "Bad designer, no cookie."