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Zynga's Buyback Deal Scores Points on the Market

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The social gaming company is back in the green today, but can it stay that way?

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MINYANVILLE ORIGINAL Zing goes Zynga's (NASDAQ:ZNGA) stock! Today is proving to be one of the game developer's best trading days in months with the stock trading up 12% to $2.39 at press time.

The upswing seems tied to several recent developments notably, the company cutting 5% of its workforce on Tuesday and updating earnings guidance on
Wednesday, and news of a buyback deal today.

According to an article by MarketWatch, the buyback could represent 10% or $200 million, of the company's total shares outstanding. Zynga's investors who bought the stock at its original $10 price will likely be upset that they are only getting $2 for their efforts, but in a Bloomberg video, analyst Michael Pachter makes clear that the deal is the smartest thing Zynga can do with its capital. Pachter believes that the buyback will help inspire confidence in the company, which has an equity stock price of $.30. He bets that if Zynga can inspire even modest growth in revenue and production, its stock will eventually rise to $4, and perhaps higher from there. That marks an improvement to be sure, but it's still down 74.65% from its 52-week high of $15.91.

Zynga blew past its sales forecast for the last quarter, though expectations were pretty low to begin with. This might have been expected because of its symbiotic relationship with Facebook (NASDAQ:FB), which also beat third-quarter expectations and soared a massive 19.13% yesterday. Zynga is also celebrating a deal with a UK-based company, Bwin.Party (LON:BPTY), which will move it into casino gaming. The financial terms of the deal have yet to be disclosed, but the games are expected to debut sometime in 2013.

CEO Mark Pincus believes that the company needs to restructure if it really wants to promote growth. Until now, the company has seen revenue from its most popular games decline, which forced it to cut its staff and consider closing offices in several locations, domestic and abroad. Still, Pincus believes that his plans to cut costs, focus on mobile games, and expand into gambling will help assure investors that the company is on the right path. Pincus is also optimistic that domestic and international gambling regulations will soon ease, allowing it greater access to the $30 billion market.

Some have speculated that the buyback might be tied to an attempt to raise stock options for its remaining employees, thus preventing the company from losing any more executive talent. Whatever the motives, analysts have taken positive note. Credit Suisse initiated coverage and BMO Capital Markets now has a "market perform" rating on the stock. Both firms set a $3.00 price target on the stock.

On the product-development front, market observers say Zynga needs to move away from its practice of stealing gameplay ideas from other previously established franchises. While legal, the moves have hurt the brand in the gaming community and made it an easy target for lawsuits from competitors like Electronic Arts (NASDAQ:EA).
No positions in stocks mentioned.
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