NEW YORK (AP) — Online game maker Zynga Inc. will face a "moment of truth" when it reports second-quarter results after the market closes Wednesday, according to Cowen & Co.
Zynga's stock has taken a beating in recent months over worries over the declining number active users. Anything but good news will likely pressure the stock further.
But Wedbush analyst Michael Pachter thinks Zynga's revenue will be better Wall Street expectats because it has been better at making money from its games, including "CityVille."
Zynga makes most of its money by charging for virtual items, such as poker chips or farm crops, in its games. Pachter believes that the number of users does not directly correlate to how much revenue Zynga can churn. That's because most people don't pay anything, and "the majority of gamers who discontinue playing Zynga titles are likely to be non-payers, with payers spending more as they make a greater investment of time in each game."
Analyst Doug Creutz, of Cowen, said that performance during this quarter will be a strong test of that thesis. The company's earnings call, he said, "will go a long way towards settling one of the key bull/bear debates on the stock: how important are daily active user measurements in projecting the company's financial performance."
He thinks that Web-based social gaming — Zynga's bread and butter — has passed its peak as people move on to mobile games. This, he added, could be a challenge for Zynga because it is so dependent on Facebook as its main source of revenue.
Analysts, on average are expecting earnings of 5 cents per share on revenue of $342.8 million, according to a poll by FactSet.
Shares edged lower in afterhours trading Tuesday.