Baird Equity Research Downgrades Zynga

Baird Equity Research has downgraded social game developer and publisher Zynga after the company said that it expected a massive loss in the third quarter that ended on September 30. The company said that it now expects to report a $90 – $150 million loss for quarter. Zynga blamed the new numbers on "weakness of certain games" and an impairment charge of $85 million to $95 million related to its purchase of Draw Something developer OMGPOP.

"The third quarter of 2012 continued to be challenging and, while many of our games performed to plan, as a whole we did not execute to our satisfaction," said Mark Pincus, CEO and founder of Zynga, in a press release. Pincus went on to say that Zynga would be "implementing targeted cost reductions in the fourth quarter and rationalizing our product R&D pipeline to reflect our strategic priorities."

Baird Equity Research said that the company's "platform transition [was] more painful than expected," adding that "the magnitude of the Q4 miss heightens our platform concerns, and we are moving to the sidelines until there is more tangible evidence of a successful turnaround in the offing."

The firm downgraded the company to "Neutral" and said that they were reducing their price target from $6 to $3.

"Our new target is based on 15x 2013E EV/EBITDA which compares with a 7x multiple for its comp group. While we see limited downside from here (ZNGA has $2/share in cash as well as significant real estate investments), and mobile and social gaming continues to grow, the extreme lack of visibility point us to the sidelines. Risks include a significant dependence upon the Facebook, Android and iOS platforms, as well on the overall interest and engagement levels in the core "Ville" franchise of games."

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