Zynga loses much of its 'Facebook bounce'

Shares of social games maker down nearly 16% in Wednesday trading after Q4 loss

Shareholders of Zynga (NASDAQ: ZNGA) who were hoping the social games maker's stock would add to recent gains related to Facebook's IPO were in for some disappointment Wednesday when shares fell nearly 16% in response to the company's fourth-quarter loss.

Zynga announced after Tuesday's market close a net loss of $435 million, or $1.22 a share, versus a net profit in the year-ago quarter of $43 million, or 5 cents a share.

The loss was attributable to a one-time $510 million expense related to paying the restricted stock units of Zynga employees as part of going public.

The company's revenue in the fourth quarter climbed 59% to $311.2 million from $195.8 million in the year-ago quarter.

Average analyst forecasts called for net income of 3 cents a share on revenue of $302 million.

While beating Wall Street expectations usually translates into share gains, Zynga's stock fell Wednesday morning to as low as 12.11, or 15.6% below Tuesday's close of 14.35.

That's because Zynga, which had a relatively disappointing IPO on December 16 -- closing below the $10 offer price -- went on a ticker tear beginning in late January thanks to the news that Facebook was readying to file for an initial public offering.

From the time rumors began leaking on January 27 of a pending Facebook S-1 filing, Zynga shares climbed 51% through Tuesday, all in less than three weeks.

Even with Wednesday's come-down, Zynga shares retained most of the gains they made since the Facebook IPO made news in late January. But it's questionable whether Zynga can hang on to the rest of its Facebook bounce since three analysts immediately downgraded shares after Q4 results on valuation concerns, as MarketWatch reports.

Further, until Zynga can prove it is reducing its reliance on 1) Facebook, from which it derives 97% of its revenue 2) a small number of games, and 3) a tiny percentage of users who buy the vast majority of virtual goods, Wall Street will be plagued by doubts about the social games maker.

Sure, Zynga reported a 13% year-over-year increase in daily active users and a 23% increase in monthly active users (MAUs, in my opinion, are inherently contradictory; how is someone who uses something once a month "active"?). But in early January I noted that:

While Zynga reports 150 million users, only 2.2% (or about 3.3 million) actually pay to play. Further, 70% of Zynga's annual $800 million in revenue comes from only 680,000 of these paying customers.

In other words ... 70% of Zynga's annual revenue comes from less than one-half of 1 percent of its customers.

Did any of that change in the fourth quarter? If so, I haven't seen the new numbers (and if they're out there, please pass them along).

Zynga Chief Operating Officer John Schappert said during Tuesday's conference call that the company is working on something called Project Z, which sounds mysterious but essentially means it's building a platform to allow Zynga gamers to play on Zynga.com instead of Facebook or Google+ (where Zynga is having trouble catching on).

Maybe that will reduce Zynga's dependence on Facebook, but it still faces the challenge of generating revenue from a healthy segment of users and a wider cross-section of games. And Wall Street knows it.

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