Drop in Facebook Gamers Lowers Zynga Share Price

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As goes Facebook, so goes the world of social media – perhaps not the whole world of social media, but certainly those companies intricately intertwined with Facebook, like Zynga, the creator of popular (at least for now) Facebook games like “Farmville,” “Hidden Chronicles,” and “Mafia Wars.” Zynga shares have declined steadily over the last few months as fewer Facebook users play games through the social media platform. This week has been particularly unkind to Zynga, whose share price dropped 10 percent on Tuesday alone. What’s wrong with Zynga? Are Zynga shares not worth what they once were? Will Zynga shares continue to decline in value?

It’s hard to say. Like other publicly traded companies, the value of Zynga shares at the present moment is tied to what people think Zynga shares will be worth in the future. And that’s what caused Tuesday’s trouble. Analysts at Cowen & Co. released a report that said, in a nutshell, that the market for Facebook games is collapsing, in part because users continue to migrate to mobile devices for entertainment. Gaming on Facebook may have already reached the high water mark, and it can only roll back from there. That is, of course, bad news for Zynga and its investors.

Talk of the decline of Zynga’s user base is not mere speculation: the number of Zynga’s active daily users dropped to 54.2 million in May, an 8.2 percent decrease, according to a Reuters report. While this is troubling, it doesn’t necessarily mean that Zynga’s financial prospects are doomed. Indeed, a decline in users doesn’t even mean that the company will pull in less revenue. The company makes a lot of money off of dedicated Zynga gamers, so this is the demographic on which they are presumably keeping their eye. As any company knows, the quality of customers is as important as the quantity. Still, as fewer Facebook users play Zynga games, the company’s revenue will decline, all other things being equal.

The value of Zynga has declined dramatically overall since its initial public offering last summer, much like Facebook’s value has declined since its IPO a couple of months ago. Investors are growing wary of Internet stocks. However, the “danger” associated with these investments may be overstated. Zynga still has plenty of room for expansion, particularly in international markets, and this may reverse its declining user base. In fact, with Zynga shares hovering around $5, this may even be a good time to invest in the company, and some large banks (like J.P. Morgan) have said as much.

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