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ZNGA Down to Its Last Life — Sell Zynga Stock Now

znga zynga logoRight before Zynga (ZNGA) reported earnings in July, I warned investors to steer clear of ZNGA.

And with Zynga stock down 15% since then, I still think it’s a bad move to buy ZNGA and that investors are better off looking elsewhere.

Sure, ZNGA has beaten the market year-to-date with a 22% return vs. about 16% for the S&P 500. But Zynga’s Q2 earnings were very ugly — ZNGA revenue plunged by 31%, bookings were off by 38% and Zynga posted a quarterly loss of 2 cents a share.

Oh yeah, and Zynga stock might have taken an even greater beating if it weren’t for an 18% cut in the ZNGA work force in June that had some hoping the company was at least getting serious about cutting costs.

Troubles at Zynga all stem from a drop in users (earnings showed a whopping 45% year-over-year decline) and a lack of new titles to keep people logging on to its games. Once the leader in games on the Facebook (FB) platform, the ZNGA FarmVille series has now fallen behind the wildly popular Candy Crush Saga from private developer King.

King’s addictive title is also pushing aside other mobile games from ZNGA, as folks prefer Candy Crush on their smartphones and tablets to Zynga alternatives.

There are changes afoot at Zynga as the company’s co-founder Mark Pincus stepped out of the CEO role. In his place, ZNGA has hired Don Mattrick, who helped bring the Xbox to prominence (and profitability) at Microsoft (MSFT), and before that built his own video game company that he sold to software giant Electronic Arts (EA).

But will that be enough to turn around Zynga stock?

In the short-term, probably not. And in the long-term … that’s a very tall order.

ZNGA Challenges Ahead

Who knows whether Mattrick will get Zynga’s creative spark back, or even whether big shops like ZNGA can ever be a logical bet for investors in this age of mobile gaming and easy development. As King and Candy Crush show, old players like large-cap video game publisher Activision Blizzard (ATVI) or gaming retailer GameStop (GME) might not be suited for this new world.

Consider that Facebook recently announced that it will be launching a mobile games publishing initiative, meant to support small- to medium-sized developers in exchange for a share of the revenue. This is essentially FB taking the Zynga model and opening up the doors to any small-time programmer who has a good idea — a serious risk to ZNGA, but a boon to teenage geeks with pet projects that only need a decent platform like Facebook to take off.

Long-term, the visibility at ZNGA is horrible based on the disruptive trends of technology and the creative challenges of the video game industry. And short-term, Mattrick admitted there will be volatility in the next two to four quarters as the company restructures.

So why, then, should investors mess around with Zynga at all given that both the short-term and long-term outlooks are unfavorable?

Steer clear of ZNGA stock. Even if it doesn’t see another big leg down, it’s unlikely the stock will move any higher in 2013.

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Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at 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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