Sometimes too much is just not big enough. Many companies expand their businesses with relative ease, yet some fail to make it to the benefit of their shareholders. The company in focus is a shining example of a corporation that appears to be steadily losing ground on the charts.
When Zynga, Inc. (Nasdaq:ZNGA) announced yesterday a conference call about its Q2 financial results scheduled for July 25, investors did not seem to care as they brought the price of ZNGA stock down to $4.95, its lowest close since it started trading on the Nasdaq on Dec. 16, 2011. As it seems, it could hardly have been any different, especially in the light of ZNGA’s Q1 results published a while ago. Why so?
If you cast a glance at the most recent financial records submitted by Zynga, you will most probably notice that the pros outweigh the cons. The company’s assets exceed its liabilities by a landslide and its revenues for the quarter ended Mar. 31, 2012 have improved by 32% on an annual basis. There is only one little thing ZNGA has failed to achieve. It is called profitability. According to its latest 10-K annual report, the company closed the 2011 fiscal year with a net loss in excess of $400 million. In fact, apart from the 2010 fiscal year, ZNGA has been operating at a loss since inception in 2007. What is more, the situation did not change much during Q1 of 2012 as ZNGA incurred another net loss of $85 million. And there is little chance that the Q2 results will indicate a positive turn of events.
If this were not enough, let us take another event into consideration. Last April, the company gave some (but not all) of its stockholders the option to sell approx. 50 million of their common shares in a secondary offering. Not coincidentally, one of the privileged few turned out to be Mark J Pincus, the very CEO of the company. The latter sold 16.5 million shares at a price of $11.64 per share raking in a total of $192 million. Back then, ZNGA shares were traded at around $12 per share. What also seems interesting is the fact that the insider transactions took place shortly after the end of the first calendar quarter of 2012, which raises concerns that the people involved with the heavy selling of ZNGA shares carried out on Apr. 3 might have predicted where the market price of ZNGA shares will be going in the months to come now that the company has incurred a net loss for the umpteenth time. So, deliberately or not, a few shareholders managed to jump ship at the right opportunity.
In spite of ZNGA’s negative financial performance, it is worth noting that the company has been putting a lot of effort to neutralize the greatest risk to its business model, i.e its seemingly indissoluble dependence upon Facebook. In this respect, the development of a proprietary gaming platform (Zynga.com), as well as seeking partnerships with third-party social game developers. Whether or not this strategy will bear fruit, however, has yet to be seen.
While Zynga’s managers have been focused on expanding the company’s business operations, their efforts appear to have failed to boost the market value of ZNGA stock. The latter has more or less been on the decrease since March 2012.
