Sales & Marketing

Is the shine coming off Zynga?

2 min read

15 February 2012

Another day and another social media phenomenon takes a bashing from shareholders after reports of weakening profits.

Shares in Zynga, a developer of games for social networks which listed on the NASDAQ market in December, fell 18 per cent yesterday after the company admitted higher costs for marketing and development of new games had knocked fourth-quarter earnings.

The stock had shot up 44 per cent since its IPO, with investors gaining confidence from Zynga’s profitable relationship with Facebook. The games developer accounts for about 13 per cent of Facebook’s total revenue.

But this eroded with the disclosure that EBITDA dropped 34 per cent to £40.5m in the final three months of 2011 compared with the previous year. Research and development costs have risen eight-fold while marketing spend has tripled, the company said.

Is this a further signal of overvaluation in the social media sector, or simply the natural outcome of a period of consolidation? Earlier this month Groupon admitted it had made a multi-million dollar loss because of spending on structural growth.

“Results were not compelling enough to cause us to materially reassess our valuation or investment conclusion on the stock,” said Ken Sena, an analyst at Evercore Partners. He added that Zynga stock trades at more than 30 times its pre-tax earnings estimate for 2013, making it a big risk.

But other analysts were more upbeat: “Zynga was one of the key developers that turned Facebook from a relatively passive communications medium to a more active and engaged social platform,” said Robert W. Baird & Co in a statement.

“While growth has slowed for both Facebook and Zynga, long-term secular shifts in content consumption, along with significant growth opportunities on smart devices from Apple and Google are too compelling to ignore.”

Others pointed out that the company is spending to maintain its leading position in the market and fend off competitors.

“The fact that R&D went up more than we expected is not a good sign,” said Benjamin Schachter at Macquarie Capital. “They are continuing to spend more money to create games.”