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."

Tweet about this on TwitterShare on FacebookShare on Google+Share on RedditEmail this to someone