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Don’t Expect a High Score From Zynga Earnings

Online gaming stock Zynga (ZNGA) has had a tough row to hoe since its December 2011 IPO. And while shares of ZNGA stock are up more than 40% in 2013, investors shouldn’t expect Zynga earnings next week to send the stock to new heights.

In fact, if the company misses expectations by a wide mark and significantly lowers guidance — as it has done in the past — it could be game over for Zynga.

A lot of optimism in Zynga lately has come from the poaching of Xbox exec Don Mattrick from Microsoft (MSFT) to replace founder Mark Pincus at the helm, coupled with hopes that efforts to get into “real” gambling instead of just video game poker will lead to a brand-new revenue stream and significant growth.

But both of these items are long on hope and short on real facts.

For starters, in April, Zynga badly missed earnings as it told Wall Street, “We continue to expect non-linear, uneven results.” While there is $1.3 billion in the bank for Zynga to play with, that kind of pressure doesn’t indicate a lot of patience from investors to figure things out.

And just as Don Mattrick took over, a new study from Elias Research showed Caesars Interactive Entertainment — a division of casino stock Caesars Entertainment (CZR) — unseating Zynga as the world’s top publisher of social casino games. That doesn’t bode well for Zynga’s theoretical growth in the space.

Also, the build-out of Microsoft’s Xbox console video game biz is not necessarily analogous to the challenges Mattrick will face at Zynga. If anything, the current hurdles facing Xbox — the age of downloadable content, gaming competition from Apple (AAPL) iPad apps and the Google (GOOG) Play online store — are the best proxy.

This is not to say that the Microsoft exec can’t succeed at Zynga, it’s just that past successes don’t really count for much in the current situation. And it’s worth noting that the company is propping up profitability where it can, including a round of layoffs several weeks ago.

But if you own the stock going into Zynga earnings, you should be realistic about the risk of a decline.

Early on, Zynga’s troubles stemmed from issues with its FarmVille empire on Facebook (FB) declining as more users have moved to the mobile experience, as well as a broader question of transparency after continued accounting problems forced the restatement of Zynga’s profits.

Now, the company’s challenges include a continued lack of profitability, stagnant top-line revenue and question of what comes next.

Investors shouldn’t gamble on Zynga stock as it tries to figure things out. Not only is the future uncertain, but the big run-up year-to-date despite a significant change in the fundamentals of the business implies that ZNGA could be set for a spill very soon.

Zynga earnings might just be the catalyst for that leg down.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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