Shares of Zynga Inc. (NASDAQ: ZNGA) slumped about 4% on Wednesday after Justin Post, an analyst at Bank of America Merrill Lynch slashed rating on the social game maker’s stock to “neutral” from “buy”, citing “less valuation upside”.
Shares of San Francisco based “FarmViille” and “Words with Friends” maker, which were reeling under tremendous pressure last year, have rebounded strongly this year as the company aggressively started cutting costs by slashing jobs, shuttering offices and pulling back non performing titles. Year-to-date, the stock is up about 47%. In addition, company’s focus on online poker business amid changing regulatory landscape in the U.S. has also boosted investors’ faith.
With many states expected to gradually make it legal to play poker online, Zynga has potential to offer long-term value, the bank added.
Zynga always yearned to enter real-money gaming business but was hindered by the regulatory framework. In October 2012, Zynga said that it will partner with U.K based Bwin.Party Digital Entertainment to offer casino style games and real-money poker games in the United Kingdom.
Subsequently in December 12, Zynga took its first step forward to enter online gaming business in the U.S. by applying for a license to Nevada Gaming Control Board.
However, Post warned that “competitive real-money poker launches and summer seasonality on core businesses could limit further (investors’) enthusiasm.”
“The only driver of meaningful earnings surprise in 2013, in our view, is with a hit new social PC game, which is unlikely and difficult to predict,” added Post, maintaining a price target of $3.90
The downgrade comes just two months after the Bank of America Merrill Lynch boosted its rating on the stock just ahead of the fiscal fourth quarter results announcement, in which Zynga surprised the street.
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