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Zynga's Earnings May Reveal Its Impending Demise

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Analysts are predicting a weak quarter for the social game company and say its long-term prospects look pretty grim.

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If every dog has its day, Zynga's (NASDAQ:ZNGA) has most certainly come and gone. While the company enjoyed early success through its partnership with Facebook (NASDAQ:FB) and the mass popularity of its games FarmVille and Words With Friends, a string of unfortunate circumstances has all but brought the company to its knees. As a result of the brain drain of many of its top C-level staff, the end of its deal with Facebook, and its decreasing presence in the mobile social games industry, the company's stock price has plummeted 72% since its IPO.

With Zynga to announce its Q4 earnings tomorrow, a number of analysts are predicting that the report will not only show further decreased growth for the social games maker, but also provide proof that major losses could be on the way. While the company's revenue did grow in the first half of 2012, Zynga's growth rate dwindled to just 3% in Q3 and its Q4 report could see a decrease by as much as a third. Looking long term, analysts expect only breakeven results in 2013, and that revenue will drop by 6% in that time.

Zynga's doomsayers aren't just motivated by the numbers, but also by the company's inability to innovate or maintain the popularity it initially generated with consumers. The company has long been criticized by the video game industry for blatantly copying existing franchises, so much so that in August video games titan Electronic Arts (NASDAQ:EA) issued a lawsuit against it, claiming that Zynga's The Ville was a shameless knock off of EA's The Sims Social game.

More concerning is the company's inability to garner an audience with its more recent titles. Recently, the company was forced to shut down 11 games, including PetVille and Mafia Wars 2, adding credence to the belief that Zynga's ability to make it as a games developer was limited. Facebook's decision to open its platform up to other developers was another major blow to Zynga's prospects because it has leveled the playing field for Zynga's competitors to develop games for iOS (NASDAQ:AAPL) and Android (NASDAQ:GOOG) devices. As more titles receive increased press from Facebook, it is likely that Zynga's domination of the site will be a thing of the past.

The company's new ventures into online gambling aren't inspiring much confidence, either. Despite some initial success in the UK, Seeking Alpha believes that the market for online gambling is limited, and hasn't really grown outside its "early adopters" stage. It's unlikely, that the industry will reach mass appeal or be a source of major profits, even if Zynga were to rise above the existing competition.

With its revenue plateauing, its core business eroding, and heavy analyst skepticism threatening its newest venture, it seems that Zynga has been backed into a corner. Unless the company can retake its share in the market with better games and services this year, it seems unlikely that the studio will remain a major player in the games industry. However, with the recent departure of its chief games designer, even making better games might be out of Zynga's reach.
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No positions in stocks mentioned.
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