Zynga takes axe to outlook, spooks Facebook investors

Wed Jul 25, 2012 10:14pm EDT
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By Gerry Shih

SAN FRANCISCO (Reuters) - Game provider Zynga Inc slashed its 2012 outlook and quarterly results badly missed Wall Street targets, sending its stock plunging 35 percent and casting a chill over Facebook Inc on the eve of the social network's inaugural results.

Investors now fear a larger-than-expected hit to Facebook's earnings, which relies on the "FarmVille" creators for about 15 percent of its revenue. Shares in the No. 1 social network, which has yet to regain investor confidence since its botched May IPO, slid more than 7 percent to a new low of $27 in after-hours trading.

Blaming its poor performance on a steep drop-off in players for its core Facebook money-makers, Zynga took an axe to its earnings forecasts, predicting 4 to 9 cents a share, down from a previous 23 to 29 cents. Zynga shares tumbled to a record low of $3.00 after the bell.

That dim outlook highlights how dramatically the fortunes of consumer Internet stocks have turned in the past year.

Zynga was among a bevy of hot tech prospects going public in 2011 on the back of a renewed dot-com mania gripping Wall Street. But since its December IPO at $10 a share, Zynga has shed almost 70 percent of its value while peers like Groupon Inc and Facebook are down 65 percent and 29 percent, respectively.

"The quarter is a disaster," said Sterne Agee analyst Arvind Bhatia.

"It's looking more and more like this was a fad because they've introduced so many new games, yet EBITDA continues to come down," he said, referring to earnings before interest, taxes, depreciation and amortization.

The number of monthly paying players, which rose to 4.1 million from 3.5 million, would in fact have declined were it not for an infusion of new players to "Draw Something", a game Zynga purchased in March and which Zynga executives now admit has not lived up to expectations.   Continued...

The corporate logo of Zynga Inc, the social network game development company, is shown at its headquarters in San Francisco in this April 26, 2012 file photo. REUTERS/Robert Galbraith/Files