Social games developer, Zynga Inc. (NASDAQ: ZNGA) was downgraded to “underweight” from “equalweight” by Morgan Stanley on Friday.
Shares of Zynga slumped after the downgrade.
Morgan Stanley’s analyst Scott Devitt said that the stock presents a very unfavorable risk/reward scenario. In the research report, Devitt said that Zynga was way too much dependent on Facebook Inc. (NASDAQ: FB), adding that the popularity of its games are waning fast amid rising competition.
The report pointed out that Zynga’s games like Farmville and Poker were losing out to increased competition in Web. According to appdata.com, the emergence of new social game developers has eroded the popularity of Zynga games on Facebook. Although Zynga Inc’s latest titles such as “Battlestone”, “Draw Something 2”, “Running with Friends”,” Solstice Arena” have performed fairly well, just one title, “Running with Friends” can be called as a resounding success, appdata.com said.
The report said that the company’s ongoing efforts to gain traction in mobile gaming segment will take some more time. Devitt believes that the embattled social games maker will resort to more job cuts. The report pointed out that Zynga still employed far too many people, which was putting pressure on the EBITDA margin.
On the Positive side, the research report said that Zynga games were still becoming popular, which is apparent by its increasing monthly users’ base. The report added that the number of daily active users have risen with new social gamers are signing in even as existing players are spending more hours on its games than ever.
Earlier in 2012, Morgan Stanley in its Blue Paper, called “Social Gambling: Click Here to Play”, wrote that Zynga could succeed in future, provided its gains a dominant position in real-money gaming business. However, the report all added that the company will not benefit until 2014/2015 as (at that moment) only one country allowed online gambling.
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