Zynga shares slide for second day in a row

June 27, 2012

LOS ANGELES (AP) — Shares of Zynga Inc. fell Wednesday for the second day in a row as investors appeared to question the online game maker's ability to keep growing its user base even after the company unveiled a strategy for establishing a digital hub that opens its games up to users outside of Facebook.

THE SPARK: Investors are worried Zynga is running out of new ideas as it girds for fiercer competition and are skeptical about the company's long-term prospects.

The company unveiled features on Tuesday that include a network designed to provide the more than 290 million players of its games with the same tools, whether they are competing on Facebook's online social network, mobile devices or the company's website.

Zynga did not immediately respond to an e-mail seeking comment Wednesday afternoon.

BACKGROUND: Though Zynga has been expanding into mobile games — it owns popular titles such as "Draw Something" and "Words With Friends" — it still derives more than 90 percent of its revenue from games played on Facebook.

The company is trying to make its digital playground more entertaining, and to prove wrong investors who doubt that it can build a long-lasting business.

ANALYSIS: In a research note on Wednesday, Wedbush analyst Michael Pachter attributed the slide in Zynga's stock price on investor worries that a decline in the number of people who play the company's games will result in lower revenue.

"We disagree, and believe that 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," Pachter wrote.

The analyst expects that Zynga will continue to dominate the social games market, as it broadens the reach and appeal of its games and increases players' engagement with the games.

The company still has the largest player audience on Facebook, with 225 million monthly average users, or roughly five times as many as its closest competitor, Pachter said.

"We think that the company's market dominance and rapid recent user growth will allow it to continue robust growth for the foreseeable future," he wrote.

The analyst has an "Outperform" rating on the stock and a price target of $17.

SHARE ACTION: Shares of Zynga, which is based in San Francisco, fell 18 cents, or 3.2 percent, to $5.58 in afternoon trading. That's well below Zynga's initial public offering price of $10 per share six months ago.