Zynga stock in free-fall

On March 21st of this year, the day when Zynga announced its purchase of fellow mobile game developer OMGPOP for $180 million, Zynga's stock was $13.72. The key part of the purchase was the Pictionary-like game Draw Something. At the time of the acquisition, the game was the number one free app, number one paid app and number one game in 80 countries. Downloaded 50 million times in 50 days, the game was bringing in $250,000 a day for OMGPOP and 3,000 drawings were being created each second. Zynga envisioned Draw Something as a great addition to its own stable of mobile games which included the hugely popular Words with Friends.

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But it turns out that Zynga overpaid for OMGPOP as Draw Something started losing players who were tired of drawing the same things over and over and who were deleting the game from their phones and tablets.  Zynga's shares started to decline and are currently trading at $2.38. That puts the value of the company's shares below the value of its real estate and cash, which combined is worth $2.46 a share. That means buyers of the stock now are essentially getting the video game business for free, although cash on hand could drop quickly. The company says it will write down $85-$95 million of the $180 million it spent on OMGPOP and analysts see weak earnings for the next few quarters. 

After Zynga lowered its own estimate for the fourth quarter, Doug Anmuth from J.P. Morgan, said the figure was below his expectations for the period as newer titles he expected to do well failed to catch on with mobile game players. Sterne Agee analyst Arvind Bhatia is looking for the company to announce some layoffs, saying he was surprised by the magnitude of Zynga's lowered earnings expectations and how badly business has deteriorated. Wedbush Morgan analyst Michael Pachter lowered his target on the stock to $4 from $7.

"The outlook for [the fourth quarter] is significantly lower than our expectations, which assumed some growth from newer titles launched this summer. We expect fundamentals to remain weak over the next few quarters as the company faces several headwinds."-Doug Anmuth, J.P. Morgan