Zynga: Playing Games

07/25/2014 7:00 am EST

Focus: STOCKS

Big companies are still fighting over the future of social media. But one corner of the online world that is being pioneered by smaller firms is the world of online, interactive gaming, suggests Thomas Scarlett in Smart Tech Investor.

One of the most interesting, but volatile companies in this field is the San Francisco-based Zynga (ZNGA), which develops social games that work on mobile phone platforms and social networking Web sites.

Zynga games have about 250 million monthly active users, and three of the top five Facebook (FB) games were Zynga titles: FarmVille 2, Zynga Poker, and ChefVille.

At one point, almost 80% of Zynga’s customers were linking to it through Facebook. But its relationship with Facebook ended in March 2013 and it now has the more daunting task of reaching out to new users on its own, in an industry that changes very quickly.

The stock’s price has fallen sharply as several top executives at the firm announced that they were leaving. This is part of a strategy by CEO Don Mattrick to overhaul the company’s approach, particularly by emphasizing more mobile games.

As for the new blood, Zynga has hired Alex Garden as President of Zynga Studios. Garden brings 25 years of gaming experience. Garden came from Microsoft having served in a number of leadership roles including General Manager of Xbox LIVE and Xbox Music.

Zynga has a market cap of around $2.7 billion; the company went public at the end of 2011. It is currently trading toward the bottom of its 52-week trading range (2.50-5.89).

Some market watchers are concerned that big companies like Google (GOOG) and Apple (AAPL) might try to preempt this field themselves, crowding out smaller competitors like Zynga.

But the gaming world requires a very specific kind of creativity, and Zynga has demonstrated a track record in this area that the other companies have not.

The bottom line is that Zynga still has a dominant position in the social and gaming sector, and while it has posted some bad news this year, investors seem to have overreacted to it. Zynga is a buy below $4.

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