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Sell Zynga: Consumer Gaming Shifting From Social Media To Smartphones

Zynga Inc. (ZNGA) has been continuously deteriorating; the stock is trading near its 52-week lows and we can predict a further downside after viewing the shift in consumer preferences from social media games to smart phone games. Due to the company's poor performance and major shareholder mistrust, its COO, John Schappert, resigned from his position.

The stock is trading at high valuations as depicted by its five-year expected PEG ratio of 1.74. Our 12-month target price is $1.78 with a downside of 60%. The company is highly non-responsive in the competitive technological world and has failed to coup up with the changing people fondness towards the smart phones. Therefore, we recommend avoiding a long position on Zynga, while in our previous report, we had already proposed a short position on the stock. The stock is down $2 (40%) since then.


The underlying reason behind this has been the shift of Facebook (FB) users from desktop computers to smartphones. According to a recent survey, smartphone users tend to play more mobile games as compared to social media games. 92% of the company's revenue is coming from Facebook. The shift in consumer preference towards smartphone games has created an alarming situation for the company.


Zynga has added three web games, but have still not been able to grab the attention of their target market, primarily due to ineffective promotion. Moreover, the company has decreased its R&D costs by 8.4%, which portrays its diminishing ability to respond to technological changes in the future.


Looking forward, it is unlikely to see a significant upside until the company shifts its focus from social media networks to the smartphone platform. The decreasing R&D expenditures portray the company's lack of product development in the coming period. We do not recommend investors to take a long position in the stock until the company discloses proper business plans, operations, and growth prospects.
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