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We reported Thursday about Zynga’s financial woes, and now this morning the market is dishing out some punishment to the social-gaming company.
The Farmville creator’s share prices dropped from $2.81 yesterday to a premarket valuation today of $2.29. The stock is currently down 20 percent from yesterday’s close to $2.24. This comes on the news that Zynga believes it will net a loss of $90 million to $105 million in the third quarter of 2012.
“It is clear that Zynga will not be able to counterbalance social-gaming headwinds this year with its success in mobile and its broader network buildout,” R.W. Baird software analyst Colin Sebastian said in a release. “The company’s platform transition could extend well into 2013, requiring the ongoing realignment of resources and alterations to product development.”
In the wake of Zynga’s huge success, concerns arose related to its overreliance on Facebook. Over 90 percent of its business is a result of the popular social-networking website. It responded by building out its own Zynga.com and mobile-gaming platforms. Those haven’t reproduced the type of results that the developer experienced when it was piggybacking on Mark Zuckerberg’s social giant.
“They have to convince investors that they can balance costs and revenues,” Wedbush Morgan software analyst Michael Pachter told GamesBeat. “Revenues aren’t growing at all, so they have to cut costs and compensate for the lack of growth. Their secondary concern should be how to begin growing again.”
Despite the string of bad news, Sebastian pointed out that the potential growth opportunity presented by Zynga on iOS and Android is too big to ignore. While it’s unlikely that Zynga will ever return to owning the market it helped create (at one point, nine of the 10 most-played games on Facebook were developed by Zynga), it still has a huge potential upside if it can properly capitalize on the huge audiences on smartphones.
“They are far from going out of business, and revenues will be ‘only’ $1.2 billion this year,” Pachter said. “So it’s premature to assume they are in real trouble. They just have a credibility problem with investors.”
Facebook’s stock can’t escape the powerful gravity of the this situation. The gigantic social network gains a significant portion of its revenues from social gaming. At one point, 10 percent of Facebook’s entire revenue came from Zynga users. It’s unclear if a waning Zynga is leaving a void that another developer will step up and fill on Facebook to replace that cash flow.
Zynga will report its official earnings on Oct. 24.
Update: Zynga’s stock slowly floated back up to close down 11.9 percent compared to yesterday’s closing price.