Zynga sees better results after sinking share prices for almost two months – Part 1

Zynga’s rally fizzled Wednesday, and if you’d listened to Sterne Agee’s Arvind Bhatia,  it never would have happened at all.

Bhatia began to question the business model behind the world’s biggest social-games creator even before its public debut last December. Zynga then spent much of January below its IPO price, but now enjoys an average overweight rating after completing a two-day rally where shares rose more than 40% on news that Facebook relies on Zynga for 12% of its revenue.

To many analysts, this solidified Znyga’s position a bit. Bhatia remains very much unconvinced. “I mean, to me, it’s a little bit silly, the way people are chasing the stock,” Bhatia said.

Zynga, which makes games like Farmville and Words with Friends, will release its first quarterly earnings Feb. 14. Wall Street expects 3 cents earnings per share.

When Bhatia examines the reports, he’ll particularly focus on one metric: unique payer, a measure of how many people regularly shell out for virtual crops and cattle.

According to Sterne Agee estimates, Zynga had only 3,507 unique payers in the fourth quarter, making up just 6.6% of all daily active users. Certainly this number of unique payers will grow—perhaps 200 more by March and less than 1,000 total for all of 2012.

With figures like these, it’s easier to understand Bhatia’s attitude toward Zynga. “Hey, it is growth,” Bhatia says, “but it’s nothing like we’d think,” given the stock’s recent rally. “It’s not growing like a hot Internet company. The valuation doesn’t seem to be reasonable to us.”

Also, many of these unique payers contribute just a couple dollars, meaning some incredibly small percentage of Zynga’s total users drive this revenue stream. Bhatia refers to these players as “the whales,” and with too many of them, Zynga could easily find itself adrift. Unfortunately, Zynga hasn’t released any figures on the quantity of these players or their exact spending habits.

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Posted by Usman Khalid on Feb 7 2012. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.