Zynga Fundamentals: Trading Zynga Stock

Zynga IncZynga Inc (NASDAQ:ZNGA) is a technology company specializing in providing social game services although executives at the company describe the business as more of a web services company as opposed to a games developer. With a short and turbulent price history, spread betting on this NASDAQ quoted stock (ZNGA) is both entertaining and risky. The company practically invented the notion of using Facebook as a games platform with Zynga’s games applications designed to run on social networking sites such as Facebook. The network is estimated to have 300,000,000 active users, which is about the same as the entire population of the United States.

Zynga Cityville

Social games company Zynga was founded in 2007, and the first game produced was “Texas Hold ’em Poker” released on Facebook. This is the company that made social gaming and play a global phenomenon, its games were originally designed to play on facebook albeit most of them now also work on mobile phones. Funded by venture capitalists, the company became the number one Facebook app developer by 2009 with games such as Farmville or Words with Friends; games that help build bonds between people and share moments. After some negotiation in 2010, Zynga agreed to Facebook’s request to monetize their games only through Facebook Credits. In essence Zynga makes money by putting for sale “virtual goods” and “advertising in games”. Buoyed up by its success, Zynga went public in December 2011 and remains the industry leader in its field..

Trading Zynga Shares

But since the IPO, things have not being going well for the game developer and social networking firm, as you can see on the daily chart above. Looking at Zynga Oct 2012 from a high of $14 a stock, the price is now around three dollars. Generally speaking it is dangerous to bet on IPO flotations; okay I can say this with hindsight but why try to trade overhyped markets? Interest in some of the company’s games is cooling down and Zynga has had trouble making money from mobile games. This is despite the fact that Zynga has been busy acquiring other gaming companies at a rate of about one a month. It seems that this crash in value can partly be blamed on the recent Facebook update which introduced the time-line. Users report that instead of having instant access to their games on Facebook, they have to go through several mouse clicks in order to play. Since 29% of the Zynga’s revenue last quarter came from Facebook users playing Farmville, such a disruption has an inevitable impact. The company’s games introduce an element of competition between players in order for them to progress and achieve their goals. Because of the lower interest from players in its games, it has become more difficult for Zynga to hold onto advertisers.

People weren’t playing Zynga’s games on Facebook and computers as much as they used to and the company recorded a loss of $183.0m from operations in 2012.

Zynga Results

Social gaming giant Zynga blamed Facebook’s new policy on this. The official reason for this change is that users now see the newer games first, and the older ones later leading to drops in user adoption for famous brands such as Zynga’s Ville titles. However, some cynics have suggested that the change may, at the least, work in Facebook’s favor for the following reason. Facebook has not done well since its IPO, and needs a boost to improve its public image, and its monetization. If it were to take over Zynga, it would have another income source and could arrange that Zynga’s games always featured prominently on the opening page. With about $4 billion in cash, Facebook could not afford Zynga at its initial pricing, but with just over $2 billion could buy and control 51% of Zynga at $3 per share.

Having a database of people who play social games is not enough. People get tired easily and may become inactive quickly with some games retaining less than a quarter of players after a month and less than 10% after 3 months.

Only time will tell if this is seen as a viable plan by Facebook. As at December 2012 Zynga still retained 5 of the top 10 games in rankings on Facebook, based on DAUs (Daily Active Users) as reported by AppData includinig games like Words With Friends and Zynga Poker, and newer games, Bubble Safari, ChefVille and FarmVille 2. Zynga is still highly dependent on games such as Texas HoldEm Poker, Farmville and Farmville 2,which generate about 20%, 16% and 15% of its online gaming revenues respectively [Zynga’s Q2 2013 Earnings Transcript].  Recently Zynga was forced to downsize 5% of its full time workforce and shut down three of its studios to help cut its costs. With the cuts Zynga will have about 2,704 full-time employees. Social gaming is currently a largely unregulated business and future regulation might also curb growth by restricting game types and the location of clients that can play which would restrict the player base, and probably also introduce some taxes which would hit profit margins. It is also worth noting that Zynga average revenue per user is just $0.05 per player which is very low.  There is also no doubt that Zynga needs even better games and innovation if it is to compete with the likes of King.com.  The company has experienced a decline in revenues recently following the surprising weakness of its key Texas Holdem Poker game and the closing of several second tier underperforming titles. Meanwhile the company has launched some mid-core games targeted at the mobile segment including War of the Fallen, Battlestone and Solstice‬ Arena.

In the meantime, spread betting on Zynga must take all these factors into account. One problem stems from a radical shift in consumer preferences away from social media games to smart phone games meaning that people aren’t playing Zynga’s games on Facebook and computers as much as they used to in the past. As more Facebook users migrate to smartphones, such users are more likely to play mobile games as opposed to social media games. The company is also battling lawsuits including one by Electronic Arts, which in August 2012 claimed copyright infringement involving Zynga’s game ‘The Ville.’ which EA referred to as a copy of EA’s ‘The Sims Social.’

At the time of writing (June 2013) Zynga executives have announced a further round of employee cost-cutting exercise that is designed to reduce 18% of its workforce so as to allow the company to reduce costs by $70-$80 million pre-tax. The company has suffered something of a player defection and is facing increasing competition and slumping revenues as more and more users abandon desktop platforms in favour of mobile platforms. This has forced Zynga to eliminate any non-core non performing games. The company intends instead to increase its focus on real-money gambling and its mid-core social games which are more addictive to users.

Zynga Trading Example: Zynga Rolling Daily

You may be interested in spread betting on Zynga, the social network gaming company. Recently it has hit hard times, with the Facebook changes making it less prominent to users. The current price for a rolling daily bet is 307.5 – 309.5. If you think that it will go down further in value then you may wish to place a short bet at 307.5 for £5 per point.

Assume that the price does continue to go down, and you decide to close your bet and take your profit when the quote reaches 247.2 – 249.2. The starting price was 307.5, and as this was a short bet it closes on the buying price of 249.2. 307.5 minus 249.2 is 58.3 points that you gained. Multiplying by the stake of £5 per point, you find you have won £291.50.

But if the price went up, perhaps because Facebook took an interest in the company, you could be left with a losing position. Suppose the price went up to 353.7 – 355.7, and you decided to cut your losses and end the bet. Your bet opened at 307.5, but this time it closed at 355.7, a difference of 48.2 points. For your chosen stake, this works out to a loss of £241.

Many traders decide to use a stop loss order, which is typically placed at the same time you take out the initial bet, to try to keep down the amount of their losses. The spread betting provider will close your bet automatically once a predetermined level of loss is reached. If you had used a stoploss order, perhaps your bet would have been closed when the price went up to 332.6 – 334.6. This time your loss is from 307.5 to 334.6, a difference of 27.1 points, which would have cost you £135.50.

Zynga Futures Style Bet

Suppose that you are certain that the shares of Zynga will go up in the near future, although you are not sure which week or month it will happen. Perhaps you would choose to place a long futures style bet on Zynga, for which the current price quotation is 307.0 – 313.0 for the furthest quarter. You decide to stake £2 per point.

You wait, and the price goes up to 586.6 – 591.5 in response to some good news. To work out how much you have won, you need to calculate the point difference you gained. Your long bet was placed at 313.0 and closed at 586.6, for a gain of 273.6 points. For your chosen size of stake, this amounts to £547.20 in profit.

But prices can go down as well as up, and you must close a losing bet if the losses become too high. Perhaps the price went down to 216.3 – 221.7, and you decided to end the trade. Now your starting price is 313.0 as before, but your closing price is 216.3, a loss of 96.7 points. This would cost £193.40.

To help reduce losses, a method that lots of traders use is a stop loss order. This requires your spread betting provider to close your bet, preventing further loss, if the price gets to a certain level. You can specify what level you want, within reason, and do not have to watch the market as your losing trade is ended automatically. Suppose the price went down to263.1 – 268.9 and your stoploss order triggered and closed the bet.

This means that your opening price was 313.0, as before, but your closing price was 263.1. The difference in points is 49.9, so for a wager of £2 per point you would have lost £99.80.

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