Analysts bullish on Zynga despite continued slide

As social gaming company stock sheds another 5 percent, Wedbush and Lazard Capital Markets set $12 price target.

Zynga underwhelmed upon its NASDAQ debut on Friday, finishing the day 5 percent under its $10 IPO value. Into its second day of trading, Zynga hasn't done much better, seeing its stock fall an additional 4.74 percent to end the day at $9.05.

Pachter believes CityVille will face Armageddon after about a year.

Despite the stock's downward course, both Wedbush and Lazard Capital Markets believe Zynga is in for a rebound before the end of 2012. In separate investor notes today, the two firms placed respective $12.50 and $12 Buy targets on Zynga, with both calling the company the clear leader in the burgeoning social gaming market.

"We believe Zynga is well-positioned for revenue growth due to its dominant market share among social game publishers, its track record of releasing very popular and durable games of the highest quality, and its myriad opportunities to expand beyond Facebook with its increased focus on advertising and the migration of its social games to mobile platforms," Wedbush's Michael Pachter said.

Those sentiments run counter to concerns out of Wall Street indicating Zynga will have a difficult time increasing revenues and profits on its some 227 million monthly users. Detractors have also expressed concerns over reports of CEO Mark Pincus' outsized control over the company, a purportedly hostile working environment, and a possible exodus of high-value employees following the IPO.

However, Pachter's assessment is supported by Lazard's Atul Bagga, who believes it would be exceedingly difficult to displace Zynga atop the growing social gaming market. To draw an equal-sized user base as Zynga would cost between $1 billion and $2 billion, according to Bagga. The company's real advantage, though, is its emphasis on analytics and tracking player usage and spending habits, he said.

Pachter also refuted the idea that Zynga will have a difficult time increasing its player base, saying that he expects the company's users to rise alongside those of Facebook. He projected that the social-networking platform will pass 1 billion users by 2015. Pachter also sees areas of growth for Zynga in the mobile space as well as an expansion into China and the opening of its own online game portal.

Of course, Pachter wasn't without concerns about Zynga's prospects. For one, Zynga's reliance on the Facebook platform puts it on unequal footing for future negotiations with the social media leader. Currently, Facebook remits to Zynga only 70 percent of revenue from Facebook Credits, which are currently the only way to purchase virtual items in games.

The Wedbush analyst also raised a flag about the concentration of revenue for Zynga's products. Though the developer has six of the top 10 Facebook games, 59 percent of its revenues came from the top three titles. Pachter also said that Zynga's "-Ville" games tend to run out of life after about a year. Going forward, he said he expects Zynga to introduce 8 to 10 new games a year, while also retiring four to five annually.

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10 comments
fightingfish18
fightingfish18

"...its track record of releasing very popular and durable games of the highest quality" Please tell me I'm not the only one who lmao'd at that. It sounds like one of these analysts has a wife the plays farmville and doesn't want to upset her by saying the company behind it is a horrible investment.

MJ12-Conspiracy
MJ12-Conspiracy

Well let's all rush out and celebrate because Michael Pachter says Zynga is on the rebound..... *note, massive sarcasm.......

Stec13
Stec13

Never thought there would be a day that I enjoyed a Zynga game... CastleVille is not only fun to play but very addicting and eats up quite a bit of my free time these days!

SaintWalrus
SaintWalrus

Casual gamers no longer as interested in farmville as before? The answer? They played Skyrim,

Hurvl
Hurvl

Well, if Pachter and Bagga says that Zynga will be alright, then that should silence all doubters, because analysts decide the future/sarcasm.

ExtremePhobia
ExtremePhobia

I think Pachter is right on the idea but wrong on the time frame. 2013-2014 it's going to start shrinking. Facebook will hit max, something else will come along and whether or not Zynga will be allowed to capitalize on it will be an issue. Capable? yes. Allowed? dunno.

rleitao
rleitao

There is a market, but it's a fleeting one, it will bull into 2012, I think so too. they are indeed overreliant in Facebook, but if there is a brand to be over reliant on these days, that is the one. I mean, I could think of dozens of other problems with their business model, one of them being that people who really play their games, actually have 3 or 4 fake profiles to boost themselves up, so their heavy user base is in fact much smaller than the numbers say. but that kind of accestion cannot and will not(no one will ever say that) be proved. their actual exposure of ads is in fact much smaller than what their numbers put out (it's at least half). but it still hold some impressive numbers. I am just quite amazed it does not have more ads in game. but then again with the size of it's user base, it can probably be minimized and still generate enough revenue. and that way keep players engaged. I am a pretty hard core gamer, with hundreds of hours of BF3 for instance, and I am giving CastleVille a shot. it's pretty adictive, and it takes up a lot of your time. but the learning curve is practically flat. I see their market. just don't know abouttheir revenue. it's a bit of a gamble (and what IPO isn't) but I think it will bull.

gatsbythepig
gatsbythepig

40.26% more to go from the initial, then I'm in

Rubius02
Rubius02

If the analysts actually TALKED to gamers and not bought into the Zynga/Facebook hype, then the IPO would have been set at like $5.

Staryoshi87
Staryoshi87

The IPO was too high, for one. For the right price I would have bit into the pie a bit, but I'll wait this one out for now.