Ahead of the Bell: Zynga

AP News
Posted: Jul 26, 2012 8:14 AM
Ahead of the Bell: Zynga

NEW YORK (AP) — Zynga and other social media companies tumbled in trading before Thursday's opening bell after the online gaming site posted poor quarterly results and cut its outlook, prompting a number of analyst downgrades.

Zynga's adjusted profit fell short of Wall Street estimates and while revenue grew 19 percent, it was not the sign of extraordinary growth that investors were looking for.

The company, which produces "CityVille" and "FarmVille" cited game delays in cutting its outlook, as well as, reduced expectations for its recently acquired "Draw Something" game and what it called a "more challenging environment on the Facebook web platform."

Shares dropped nearly 40 percent Thursday in electronic trading. The news also dragged down shares of Facebook Inc. by 7 percent, a company that got about 12 percent of its 2011 revenue from Zynga.

Citi analyst Neil Doshi said fewer people played games on Facebook, which accounts for the majority of Zynga's revenue, during the second quarter, possibly because more people are accessing Facebook through mobile devices, reducing the amount of money Zynga makes off the games.

That may show up in Facebook's second-quarter revenue when it reports its own quarterly results later on Thursday, he said.

Doshi cut his rating for Zynga to "Neutral" from "Buy" and slashed his price target to $4 from $12.

"While we are positive on the long-term prospects of social and mobile gaming, and think Zynga has a clear advantage to be the leader on these platforms, near-term fundamentals have started to crack," Doshi wrote.

Stilfel Nicolaus analyst Jordan Rohan also cut his rating to "Hold" from "Buy," saying that there was nothing good about the quarter's results. He noted that Facebook's app center now focuses players on new games and reduces the flow of traffic to the top 10 Facebook games, most of which Zynga controls.

Baird's Colin Sebastian backed his "Outperform" rating for the company, but noted the shift in Facebook's focus toward new games and added that players may be tiring of management-style games such as "FarmVille."

"While shares will now be in the 'penalty box,' right now, Zynga should continue to benefit from the expanding markets for social and mobile games," Sebastian wrote.

In premarket trading, Zynga shares fell $1.98, or 39 percent, to $3.10, while Facebook dropped $2.18 to $27.16.

Since Facebook's initial public offering in May, shares of Zynga Inc. have lost about 39 percent of their value.