Analysts see recovery sprouting at Zynga

Last Updated: Thu, Oct 25, 2012 20:41 hrs

Zynga Inc’s quarterly revenue beat and its higher full-year earnings forecast show the embattled ‘FarmVille’ creator might be on the path to recovery, analysts said, with at least one brokerage upgrading the company’s stock.

Shares of the company were set to open 17 per cent above Wednesday’s closing price of $2.12 on Thursday.

Zynga raised the lower end of its 2012 earnings forecast on Wednesday and also announced a new deal with British company to offer online real-money gambling and a $200 million share buyback plan.

“The announcement of a buyback, while rare for a company that less than a year ago was considered a ‘high-flying’, fast-growing ‘hot’ IPO, nonetheless signals that the board is confident in the company’s future,” Needham & Co analyst Sean McGowan wrote in a note. “While not bullish on the likely success of Zynga’s new titles, since management recognizes that its older social games on Facebook are falling, it will spend accordingly and pivot more quickly to mobile,” McGowan said. Zynga laid off five per cent of its full-time workforce and shut its Boston office on Tuesday, as part of a cost-cutting campaign that could eventually see the company close its Japanese and British studios as well.

While it is healthy to evaluate cost-cutting initiatives, any material reduction in Zynga's creative talent could also lead to an erosion in innovative new game development, Piper Jaffray said in a note.

A new share buyback and real-money gaming partnership with will help, but ultimately Zynga needs to demonstrate it can produce hit titles on multiple platforms - mobile, social and browser, Robert W. Baird & Co said in a note.

As sales from one-time cash cows, "FarmVille" and "CityVille," are fading fast, Zynga is now investing more heavily in "mid-core" games, which require more development resources but are more immersive.

"We expect the strength of its development capabilities as well as its distribution to eventually drive better performance; we believe caution is warranted until we see signs of improved execution," BMO Capital Markets analyst Edward Williams said.

Since going public at $10 per share, Zynga has lost over three-quarters of its market value. It has been hit by delays in its game pipeline as older titles fade, while it has struggled to come up with new hits for mobile devices.

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