Two Stocks That I thought would be doing Better - Zynga and Facebook

As a formerly addicted Mafia Wars player, I saw the value of Zynga early on. When I was a player, I noticed that there were always, literally, millions of MW players online at a time. And the structure of the game was so simple, yet so brilliant. You get to a level, only to get to more challenges and get to that higher level. And one of the biggest factors in reaching that next level? Time. Time spent in the game, which also meant time spent in Facebook. Everything is integrated within Facebook, so that users constantly jump in and out of Mafia Wars, while staying inside Facebook… Game updates for example: “Someone has given you a free gift”, “Someone needs your help on a challenge” , or “Someone needs your help in a War” would stream on your Facebook Homepage, and you would click the link and reenter Mafia Wars. Then within Mafia Wars, there would be similar reasons to leave the game and go back to Facebook.

There are other ways Zynga benefits Facebook. For starters, you immediately need at least 501 people in your mafia or you will get your butt kicked. This means players have to recruit friends, and those friends would also be spending hours in Mafia Wars, which means spending hours in Facebook….and those friends would be recruiting other friends for there first 501 mafia family, and the cycle goes on. Mafia Wars is free, but of course, for a few bucks you could buy some necessary items to help advance your mafia to the next level. So revenue comes from Ads and the game itself.

And this is just one of the very addictive Facebook games that Zynga has produced. They also have FarmVille, Zynga Poker, CityVille and PetVille to name just a few more. All of which are extremely popular and probably just as addictive (I only let myself get addicted to MW). To me Zynga seems like a money making machine with endless possibilities….

That is why I was so surprised when I read about Zynga's recent stock troubles. Last Wednesday, not only did Zynga stock plummet 40 % (Stock Symbol ZNGA), but now the company is being investigated by at least 6 different Law Firms after company insiders (including CEO Marc Pincus) had allegedly dumped 500 Million in stock prior to Wednesday’s earnings report.

ZNGA, which started trading on the NASDAQ Mid December of last year and reached a high of nearly $15 in Mid March, is now trading just over $3. Zynga Blames a more challenging environment in Facebook (not as easy to broadcast posts is it? The need for 501 friends in Mafia Wars, etc… Mafia Wars and similar Zynga games thrived when Facebook was more open and "friend friendly").

The statement. “A more challenging environment” from Zynga about Facebook doesn’t surprise me. Zynga and Facebook have not always gotten along. A few years ago (2010),there was speculation that Zynga might leave Facebook, due to the fact Facebook was making it harder for players to interact. Back then, Zynga was boasting 244 million active players monthly, but were dropping millions of players due to Facebook’s policy changes and renovations. Zynga stayed of course, but it’s only gotten tougher.

While the statement from Zynga about the tougher environment doesn’t surprise me, Facebook’s rocky relationship with Zynga does surprise me. Why would Facebook make things so much tougher on one of its best revenue sources? Zynga puts out some of the best (and most addictive) social games on the internet. Games that keep millions of players inside of Facebook,… FOR HOURS. …..and while Zynga announced they will not be leaving Facebook, they are opening up “other distribution channels” including their own Zynga.com, which as I just checked now, has over 1.2 million people currently online. Which now leads me to my next current stock disappointment..

Despite the fact Facebook, Stock symbol FB, reported last week that Q2 revenue rose over 30%, the stock continues to slide downward. Concerns about their mobile application, sour IPO investors, and revenue that was “good, but not good enough” are to blame for the current stock tumble, which fell over 11% on Friday.

Some IPO investors are angry at Facebook over the speculation that instead of getting the normal 10-20 percent discount normally rewarded for getting in early, Facebook valued the stock as high as it could. This high valuation caused the IPO to plummet almost immediately when it went public. And in today's market, when a stock is valued at approx. 48X projected earnings, even Q2 revenue growth of 30% can’t thwart of a stock sell off, because revenue growth for Q2 wasn’t as good as Q1. It’s reported that Mark Zuckerberg lost 3 billion Wednesday through Friday last week, (while the DOW and NASDAQ finished up the best 3 Day Rally in 2012). And Facebook stock will not be going back up any time soon….

Facebook will be Freeing up 1.7 billion shares over the next few months starting in August as company employees and insiders will be able to legally sell their holdings after the SEC required “IPO lockup” period has expired. You can expect the shares to sell off sharply as company employees and insiders will certainly not want to hold all of their new wealth “in one basket”,.. especially a basket that has already slipped 40 %.

Bottom line, Facebook will have to aggressively look to beat investor expectations each quarter or will suffer more decline. One way not to do that? Get rid of one of your best symbiotic partners – Zynga.

My opinion? Facebook and Zynga need get into cooperation mode quickly, before they both split up like angry rock stars and stomp off to do “their own thing”….. only to find out years later that they only sold Gold Records when they were together…….