Is Zynga Merely A Stock Option For New Employees?

Zynga Inc (NASDAQ: ZNGA) reported better-than-expected second-quarter results and announced that the company has appointed former Electronic Arts Inc. (NASDAQ: EA) executive Frank Gibeau to its Board of Directors.

Zynga shares were down after hours, falling more than 2 percent as of 5:45 p.m. EST. Shares were actually gaining in Friday's pre-market session, up more than 2 percent. Analysts suspect the decline is due to the company's Q3 EPS guidance of ($0.02) to ($0.01) versus the Street's estimate that the company would finally break event.

"Zynga is basically a stock option," Sean Udall, CIO of Quantum Trading Strategies and author of The TechStrat Report, told Benzinga. "It's a $2.50 stock. [New employees] can get loaded up in a massive number of shares or options. It's like a cheap stock option with quite a bit of time value."

Udall said that if the stock goes to $4, $5, $6 or even $8, Zynga executives would make a "mountain of money." Global Equities Research analyst Trip Chowdhry said that Zynga is a "conception company based on some completely false assumptions."

"Pretty much Zynga is a company that will disappear over the next few years," Chowdhry told Benzinga. "Investors and executives who are moving from Electronic Arts to Zynga are clueless. The only reason they became so successful is because of the novelty effect and the distribution of Facebook."

Chowdhry noted that, as with anything consumer-oriented, fatigue set in "very fast."

"Things that are cool today become stale in a matter of a few weeks," said Chowdhry. "That is a pandemic problem for Zynga. It is a slow and declining business. Executives who moved [from EA]…are probably those who were on their way out. A smart executive can see through the valuation of Zynga. Zynga is only able to attract the leftover talent from Electronic Arts."

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Is There Hope?

Udall said that Zynga's MAUs number (which declined 32 percent year-over-year and is down 18 percent sequentially) is "relatively disturbing." But he thinks there is still a chance for the company to turn things around.

"Just a quick, back of the napkin look, they've got about $1.2 billion in net cash on the balance sheet," he said. "If they could ever get hits going and revenues going and a couple big, they have a ton of balance sheet power to put behind the idea. This is a company that could come back. They wouldn't need one hit, they need a franchise that grows or a string of hits."

Udall also said that any company with at least $1 billion in net cash "always has a chance." However, he knows of several similar firms that ultimately distributed their cash to shareholders and shut down operations because they stopped growing.

"If you aren't growing, you're dying," said Udall, adding that the market won't tolerate Zynga if it can't grow.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.

Image credit: tarikgore1, Flickr